Langton Capital – 2020-11-20 – PREMIUM – Outlook for 3 Dec, GfK confidence, Deltic, eviction legislation etc.:
PREMIUM – Outlook for 3 Dec, GfK confidence, Deltic, eviction legislation etc.:
PREMIUM EMAIL – PLEASE DO NOT FORWARD:
A DAY IN THE LIFE:
Is it just me or has it been something of a slog getting to Friday?
But we’ve got here and, as usual, it’s time now to start working on the excuses you’ll need to drag out if you’re not to do all (or any) of the jobs that you’ve been ‘putting off to the weekend’.
Because clearing out and cleaning the greenhouse, demolishing the coal bunker to make a brick-lined flowerbed, collecting all the fallen apples, sweeping up leaves and cutting back the Virginia Creeper are all jobs that feel better in the contemplation than in the act itself.
Indeed, jobs like those are like a good cheese, they need to mature a bit. Have a good weekend and let’s move on to the news:
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THE MORATORIUM ON BUSINESS EVICTIONS: This will end, at some point. What happens then? 20 Nov 2020:
• The free market isn’t working right now. That may be a good thing. Landlords are not permitted to evict tenants who are not paying their rents.
Where we are at:
• On 16 September, the government extended ‘support to prevent business evictions until the end of 2020.’
• It said: ‘this move will help businesses over the coming months and protect people’s jobs’ adding ‘this is an addition to the £160 billion package of support available for businesses during the pandemic.’
• This moratorium ends on 31 December.
• It does not seek to forgive rent. Accrued liabilities will still be enforceable though not immediately. The government says it will ’also extend the restriction on landlords using Commercial Rents Arrears Recovery to enforce unpaid rent on commercial leases, until the end of the year.’
The tenants’ commercial decision:
• Tenants are a) free from the fear of forced eviction for the time being but b) they could still be racking up debts that are legally enforceable
• And c) they will potentially be personally liable for debts run up if they are held to have been trading whilst knowingly insolvent
• Proving c) above could be difficult as, to take a view, you would need to have a view on opening restrictions, lockdowns, demand etc – and nobody knows much about any of those variables, not least, perhaps, those in government
• But the point remains. Evictions are not happening but that does not mean that the tenant should not pull the ripcord themselves and, if they are in a hole, at least stop digging
• They perhaps should not trade if they see no reasonable prospect of returning to profitability. Hope springs eternal but they might be wasting the time and money of all concerned
• Fitout costs are sunk. i.e. gone. They should only really enter the equation if they are saleable. Easy to say but emotions run high
• HMG said in September ‘the government is clear that where businesses can pay their rent, they should do so, as this support is aimed to those businesses struggling the most during the pandemic.’
• It is a fine line to tread between protecting viable businesses from predation on the one hand and encouraging the creation of zombie companies on the other
Giving one third party’s money to another:
• This is zero sum. Landlords are forced to remain inactive.
• This a) won’t last forever and b) doesn’t stop landlords from recovering accrued rent in the end
• Robert Jenrick said in September his move would ‘stop businesses going under and protect jobs over the coming months.’ Partly true but, again, one party, the tenant, is being invited to run up large debts in order to ‘protect’ jobs
• Perhaps, one might suggest, the stuff has been merely slowed on its way to towards hitting the fan and, in some circumstances, that’s all that can be hoped for
The landlords’ decision:
• Seize the property?
• If a tenant has invested significant funds in the F&E and you can relet the premises, then landlords have an incentive to take properties back where contracts have been breached (e.g. not paying the rent)
• Support the tenant?
• Altruism may exist. Or the landlord may believe that they can’t rent out the property easily and will be stuck with service and insurance charges and business rates on an empty property if they do not.
• Perversely, this could mean that there are greater incentives to throw out the tenant if business is improving (because the F&E could more easily tempt in a new operator to rent the unit), than if it is worsening
• Banks owed money sometimes have similar incentives
• The government said somewhat hopefully in September ‘the guidance is clear both landlords and tenants should continue to work together to agree rent payment options if businesses are struggling.’
• Charlie Munger said ‘show me the incentives and I’ll show you the outcome’.
• Consider a unit on £100k rent where the rental yield is 5% (i.e. the property is worth 20x £100k = £2m)
• A landlord’s capital value is a multiple of rent whilst one off costs (e.g. evicting a tenant) are, well, one off.
• The landlord may have a unit where the tenant has paid say £800k for a refit and for F&E – but he/she can’t pay the rent.
• If the landlord a) throws the tenant out and b) attracts a new tenant who will pay £125k rent on a new lease (15 or 25 years) because he/she gets £800k of kit for nothing then c) the ‘value’ of the property rises to 20 x £125k = £2.5m.
• Of course, in the above case, the tenant would be advised to assign the lease for a premium to the new tenant for a premium (with the rent staying at £100k) but, as always, this would all be the subject of negotiation.
PUBS & RESTAURANTS:
Lobbying re post-2 December environment continues:
• CAMRA has called for the tier systems to be changed to allow all pubs trade in December. The group has commissioned YouGov research that has found that the majority of pub-goers believe that pubs and other hospitality venues offer a COVID-secure environment.
• YouGov finds that 82% of GB adults who have been to the pub at least once in the last 6 months felt hospitality businesses were COVID-secure environments after the investment many operators have made in health security
• CAMRA has queried on a number of occasions just how much transmission is taking place in pubs. It has asked ministers to publish the evidence on which decisions are being taken about regarding the tier system and other restrictions.
• CAMRA is calling for all pubs, including those that do not serve main meals, to be allowed to open next month. Chairman Nik Antona comments ‘businesses should be allowed to open based on whether they can provide a COVID-secure environment – not based on whether they serve food. Publicans have invested thousands to keep their customers safe this year and comply with additional regulations and track and trace requirements, and this research shows that customers recognise this too.’
• CAMRA says ‘we are particularly concerned that wet-led pubs have been hit by forced closure in Tier 3 areas even before lockdown and have been left out from the VAT reductions that only apply to food and non-alcoholic drinks, despite needing support just as much as other hospitality venues. It’s vital that they are given the chance to trade after lockdown ends.’
• It concludes that pubs are the home of responsible drinking and says ‘this Christmas, we believe pubs should be the COVID-safe home to enjoy a pint.’
• The Sun has weighed in saying that ‘Boris Johnson must listen to pubs and shops.’ It says such outlets have ‘stuck to the rules’ and adds that ‘if the law now forces them to pull down the shutters during the festive season they will stay down forever.’
• Sky reports that supermarkets are the venues most often mentioned by people who have caught Covid-19 as being sites that they have visited in the run up to their contracting the virus. This does not, admittedly, mean that they caught it there. The second most common location reported by those who tested positive for COVID-19 were secondary schools.
• The Scottish Beer and Pub Association yesterday called on MSPs to reject the proposed Tied Pubs Bill when it is voted on one week today. CEO Emma McClarkin says ‘this Bill is not evidence-based, and far from helping Scotland’s pubs, it poses a real danger to future investment in the sector, entrepreneurship opportunities, threatens jobs and it should be resoundingly rejected by MSPs.’
• Ms McClarkin says the bill ‘was ill conceived before Covid-19, but it would be economically ruinous to the sector if it was passed in the current circumstances and it is vital that all MSPs show their support for Scottish pubs by voting this Bill down.’
• Data produced by the ONS has suggested that more than a third of hospitality firms have little or no confidence of surviving the next three months, reports the BBC. Only 82% of hospitality firms were trading even before stricter restrictions were made UK-wide a fortnight ago.
• Few doubt this will linger. But over 200 Facebook workers worldwide are reported to have accused the firm of forcing its content moderators back to the office.
• Global real estate advisor Avison Young has commented on the lockdown in Wales. It says its ‘Recovery Index for Cardiff begun to decline significantly in mid-September, following the imposition of local restrictions on surrounding areas.’ The firebreak in Cardiff was between 23rd October and 9th November.
• Comparing Cardiff with Bristol, the Welsh capital lagged by c10% at the end of September but this dropped to a 20% underperformance by 1 November. The performance in Cardiff post the end of the lockdown has not yet been collated.
The outlook for the consumers, confidence etc:
• We most often comment on supply side issues, but demand is also vital. Consumers need to have the money to spend and they need to have the desire and the confidence to spend it.
• The Telegraph says that ‘workers are bearing the economic cost of the Covid crisis with one-fifth of companies imposing pay freezes in the three months to October despite the resurgence in GDP growth as industries reopened.’ Pay rises across the whole economy have been around 2%, down from the 2.5% achieved in 2018 and in 2019.
• GfK has updated on its UK Consumer Confidence index saying that there has been a ‘worrying decline in consumers’ views on personal finances for the year ahead.’ It says that its measure fell by two points to minus 33 points in November. It says that three of its five measures decreased in comparison to the October 23rd announcement and two were unchanged.
• GfK says ‘in our post-lockdown pre-vaccine Index this month we report another deterioration in headline consumer confidence to minus-33, a drop of two points. Although there is no movement in our views on the economy, people are clearly losing their nerve regarding their personal finances with scores for the last 12 months and the year to come sharply down by seven points and five points respectively.’
• GfK says ‘this will deal a blow to any future rebound because bullish consumer spending fuels the UK economy and low confidence is the enemy of recovery. The second lockdown couldn’t have come at a worse time for the UK’s high-street retailers and it’s no surprise that our major purchase sub-measure is once again mired deep in negative territory. On all fronts, economic headwinds still outnumber tailwinds sadly and consumers can be excused for showing little in the way of Christmas cheer.’
• The ONS says that one in seven companies in the UK fear they are at risk of collapse in the next three months. The figure rises to over 30% for businesses in the hospitality and food service industry.
• Peacocks and Jaeger have fallen into administration, putting more than 4,700 jobs and c500 shops at risk. Owner Edinburgh Woollen Mill Group had failed to find a buyer for both businesses.
• Mintel reports that UK households will spend £6,600 less this year as a result to fhe pandemic. Spending on holidays, eating out and transport has collapsed but there has been increased demand for food and drink bought for home consumption. Mintel says ‘some sectors have benefited from the lockdown, with retail sales of food and drink boosted as all eating and drinking occasions moved into the home.’
• The BBC reports that millions of public sector workers face a pay freeze in next week’s Spending Review. The Treasury has expended billions supporting individuals and businesses through the pandemic and it will have to source the funds from somewhere over time.
• The TUC reports that a record number of young workers lost their jobs this summer due to the coronavirus pandemic. The number of 16-to-24 year-olds in employment fell by 8% to 3.5 million. The TUC says ‘we are on the edge of a national unemployment crisis. This generation of young workers must not be abandoned to mass unemployment.’
• Thinktank Centre for London says that the labour market in the capital has been harder hit by Covid-19 than the rest of the UK. This is likely as a result of London’s heavier reliance both on tourists (international and domestic) and on workers and visitors who have to travel further to their destination than they do elsewhere in the UK.
• There are reported to be around 200,000 fewer people working in London in October compared with last year. The Guardian reports that ‘by October, there had also been a 170% increase in the number of people in London claiming unemployment-related benefits, compared with the same period in 2019, equal to about 300,000 new claims.’
• Deltic has written to landlords warning that the company could collapse unless a sale is agreed imminently. Around 1,000 jobs could be lost. Sky reports that the company’s CEO, Peter Marks, has said that ‘no interested party is prepared to proceed and accrue a rental liability without the knowledge that long term occupation of the property can be secured’. He says ‘without a successful sale, the business will have no option but to be closed’. Some 52 units would be shut.
• Deltic says ‘the management team of Deltic Group firmly believe that when they are allowed to open they will once again have a viable long term business. In the interim any investor will have to fund substantial holding costs to maintain the staff and meet statutory obligation until the clubs can be reopened.’ It says ‘whilst bidders are willing to invest without clarity on an opening date, they require the support of the landlord group through the closure period.’ Deltic says formally that ‘it has received a number of credible offers and will provide an update in due course.’
• McDonald’s is reported set to invest $381m in expanding its coffee outlets in China over the next three years.
• Eataly is to open a 40,000 square foot Italian food and wine hall in London’s Liverpool Street next year.
• Starbucks is to give all US employees a pay rise of at least 10% from 14 December this year.
HOTELS & LEISURE TRAVEL:
• Bill Gates has predicted that 50% of business travel and 30% of days in the office will disappear. He says ‘there will be a very high threshold for actually doing that business trip and there will be ways you can work from home a lot of the time.’
• Aparthotel operator Staycity Group has reported the conclusion of a €70m debt and equity refinancing ‘ensuring the privately-owned company will emerge from the impact of the Covid-19 pandemic fully capitalised and ready to continue with its European plans to almost double the size of the company over the next 18 months and to operate 15,000 keys by 2026/2027.’
• Staycity’s Tom Walsh says ‘despite unprecedented challenges, we have achieved occupancies above 50% year to date. This is significantly ahead of traditional hotels and underpins the robustness of the aparthotel model which is increasingly regarded as an attractive asset class.’
• STR reports that the US hotel industry saw occupancy in the week to 14 November down around 33% on last year. Room rates were down 29% and REVPAR was some 52% lower.
• The FT reports that ‘Cineworld is looking to arrange a rescue deal that could mean UK cinema closures.’
• It says ‘one option being discussed with bank lenders is a company voluntary arrangement, an insolvency process that could help Cineworld cut its rent bill.’ AlixPartners is reported to be advising on developments.
FINANCE & MARKETS:
• UK / EU trade talks have been impeded due to a member of the EU team testing positive for Covid-19.
• The IMF has warned that the global recovery from the first wave of coronavirus in the spring has begun to lose momentum. It says ‘the economic path ahead remains difficult and prone to setbacks.’
• Sterling up a little at $1.3279 and €1.1171. Oil higher at $44.20. UK 10yr gilt yield down 1bp at 0.33%. World markets mixed yesterday. London set to open up around 13pts.
RETAIL WITH NICK BUBB:
• Consumer Confidence Watch: After today’s latest report from the widely followed monthly GFK Consumer Confidence index, we would again highlight that that the record -39 index low seen in July 2008 has still not been tested so far in the current crisis…but the overall index still fell to -33 from the -31 level seen in the report for last month (versus the -36 low seen in the early June “flash” report), albeit that was not quite as bad as the -34 expected in the City and polling was done between 1st and 14th November (ie before the latest hope of a COVID vaccine). GfK’s Client Strategy Director Joe Staton says in the press release that “This will deal a blow to any future rebound because bullish consumer spending fuels the UK economy and low confidence is the enemy of recovery…The second lockdown couldn’t have come at a worse time for the UK’s high-street retailers and it’s no surprise
• Planet ONS Watch: In the so-called real world, as per the BRC-KPMG figures for October (the 4 weeks to Oct 31st), underlying Retail Sales were yet again surprisingly good last month overall, given the continuing boost to Non-Food sales from household goods demand and the boost to Food sales from the collapse in “eating out”. And “seasonally adjusted” life looks to have been even better on the High Street on that strange parallel world, the Planet ONS (aka the Office of National Statistics in Newport), via the official Retail Sales figures for October, which were released at 7am this morning…City economists (who treat the ONS figures as the gospel truth) will be impressed with the 1.2% improvement in month-on-month seasonally adjusted sales volume (inc fuel), up 5.9% year-on-year, as the consensus was for a 0.6% fall. The ONS reports that non-seasonally adjusted value sales (ex-fuel)
• BDO High Street Sales Tracker: The BDO High Street Sales Tracker today for medium-sized Non-Food chains flags that things stayed positive yet again in w/e Sunday Nov 15th, despite the non-essential store lockdown, helped perhaps by some early Christmas buying Online: BDO Fashion LFL sales were down, as usual, but by only c3% (even though Store Fashion sales were down by as much as c75%), but Total BDO LFL sales (including a handful of Homewares and Lifestyle retailers, as well as the Fashion retailers) were up by c3% (down c69% in Store sales, but up c142% in Online sales).
• Trade Press: Retail Week magazine has been published today and the front cover is a photo of the boss of the embattled Pret A Manger chain, Pano Christou, to flag up the main feature on his rollercoaster first year in charge (“The recipe to save Pret”). RW also have articles about the very good year that the Shop Direct home shopping business (aka The Very Group) has enjoyed (“’If it’s not a record peak, I’m resigning,’ says new boss Henry Birch”) and Retail Planning (“After an unpredictable 2020, is the five-year strategy dead?”). The Editor of RW looks ahead to Black Friday in his column, warning that “Don’t even try to battle Amazon this Black Friday” and thundering that “Now more than ever retailers must focus on what Amazon can’t do”.
• News Flow Next Week: Tuesday brings the AO.com interims and the Pets at Home interims. The ScS AGM is on Wednesday, along with the Chancellor’s Spending Review. The delayed Ted Baker interims and the Motorpoint interims are on Thursday, along with the ASOS AGM. The Hotel Chocolat AGM is on Friday, but Friday will be more notorious for being the annual Online discount jamboree called BLACK FRIDAY…