Shop spree will stuff landlords in bargain bin

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A woman walks after shopping at IKEA's first city store in Mumbai, India, December 8, 2021.

LONDON, Jan 6 (Reuters Breakingviews) - After a strong run for clicks, bricks will be back on the agenda in 2022. Amazon.com and Ikea are among the many retailers planning to rent or buy new locations. In theory, it’s a good sign for embattled landlords. With so much available space, however, their negotiating leverage is weak. As a result, property stocks will be driven deeper into the bargain bin.

For the past decade, shopkeeping titans including Zara owner Inditex and H&M (HMb.ST) have been rapidly shifting their businesses online. During the pandemic, that trend accelerated with online purchases in the United States soaring to represent a record 20% of total sales in 2020, according to e-commerce research firm Digital Commerce 360. That has pummelled the valuations of mall owners such as Unibail-Rodamco-Westfield (URW.AS), Land Securities (LAND.L) and Klépierre (LOIM.PA), which depend on a steady stream of tenants vying to occupy their stores. The trio trade at an average discount of about 40% to their net asset value.

The provisional end of lockdowns is changing behaviour again. Shoppers are seeking out human interaction, prompting brands to scramble for more physical space. Shoemaker Allbirds (BIRD.O), freshly capitalised from its U.S. initial public offering, intends to open hundreds of stores. Ikea recently paid $500 million for Topshop’s former flagship building on Oxford Street. In China and India, some 90% of retailers told commercial real estate services provider CBRE they intend to expand their store portfolios in 2022.

These evolving trends demand a fresh look at property owners and managers. The trouble is that the volume of empty storefronts leaves them in a weak spot. In Midtown Manhattan retail hubs, for example, the vacancy rate is 30%, according to the Real Estate Board of New York. On London’s Oxford Street, it’s 14%, more than five times the 15-year average, says real estate consultancy Knight Frank.

Under the circumstances, retailers can demand rock-bottom rents and extra perks. In regional parts of Britain, Legal & General (LGEN.L) and others are offering new tenants two years of free rent. Mall owners Hammerson and Landsec also have revised leasing terms. Short-term contracts and ones linked to merchant revenue, previously shunned as uneconomic, are on display. It’s hard to invest in landlords when they’re effectively giving away the store.

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(This is a Breakingviews prediction for 2022. To see more of our predictions, click here.)

CONTEXT NEWS

- Shoemaker Allbirds, which began mainly as an online retailer, said it is in the early phase of opening “hundreds of potential locations in the future,” according to its Aug. 31 initial public offering prospectus.

Editing by Jeffrey Goldfarb, Thomas Shum and Karen Kwok

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