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Navigating the Uncertain Retail Property Market

Authored by Louisa Ong

Edited by Samuel Tan

The hardest hit on the retail property market

The COVID-19 outbreak has created an unprecedented crisis for the retail property market because of the way social distancing measures have limited people’s interactions with physical retail spaces. The real estate market suffered the largest hit by the pandemic, with UK retail footfall plummeting by more than a fifth compared with 2019[1]. Beyond the immediate challenge of decreased demand for retail spaces, the longer this crisis persists, the more likely we are to see the plummeting value of retail real estate as more retailers close down and e-commerce begins to grow. With the existing threat of Brexit and the highly competitive nature of the retail industry, many around the world raise questions on real estate leaders’ ability to deal with uncertainty in an already vulnerable market.

Despite bringing many obscurities to the retail property market, COVID-19 has solidified and accelerated the ongoing trend of e-commerce. Retailers’ shift to e-commerce channels will have a critical influence on how the market will fare over the coming years, and we urge real estate companies to incorporate this emerging trend in its existing products to ensure future success.

This report, therefore, aims to help inform real estate leaders of the immediate and long-term challenges posed by COVID-19, as well as the strategies they can consider taking to build resilience in the vulnerable retail property market. We recognize that real estate companies need to go beyond just adapting to the pandemic, and start laying the groundwork to deal with what may be permanent changes for the industry after the crisis.

Pre-COVID-19: The vulnerable retail property market

The density of retail shops in the UK is the highest within continental Europe

The UK has the most shopping centers in Europe, with over 1,500 traditional centers, retail parks, and factory outlets[2]. This has contributed to the highly competitive nature of the retail sector and with many retailers struggling to compete after the pandemic, we’d expect to see high numbers of bankruptcies and CVA proceedings in the UK.

Brexit will likely increase retail prices in future

Leaving the EU will cause lower trade between the UK and the EU because of higher tariff and non-tariff barriers of trade. For example, under the new tariff schedule, 85% of food imports from the EU will be subject to a tariff of more than 5%[3]. Lower retail trades imply higher costs for consumers and thinner profit margins for retailers, hampering retail tenants’ ability to make lease payments.

Overall, negative sentiment towards the UK retail property market outlook is attributed to the highly competitive nature of the retail industry and Brexit. This implies that retail property values are expected to decrease, and the amount of uncertainty in the market calls for a great need for real estate companies to not only focus on tackling the immediate challenges of the pandemic but also long-term measures to shift focus away from retail real estate and ensure balance sheets remain resilient to future shocks.

Immediate and long-term challenges of the pandemic

An immediate decline in cash flows due to lockdown measures

Figure 1

Lockdown restrictions have led to the net closure of 6,100 retail shops[4] across the nation, almost 200% the number of closures from 2019 (Figure 1). Research shows that only 41%[5] of retail tenants paying their rent for the second quarter in March 2020 and this statistic emphasises the increasing uncertainty towards retail tenants’ ability to make rent payment as more retailer stores are forced to close. As retailer’s business performance is tied to their ability to pay rent, companies’ focus now should put a sharper focus on supporting rent structures that vary with tenants’ performance.

Growing trend towards e-commerce will hamper long-term demand for retail space

Tenants’ inability to pay for rent accelerates the transition to e-commerce within the retail industry, further decreasing demand for physical retail spaces in future. We expect the UK to be one of the quickest nations to adapt to this digital change because of the nation’s well-developed infrastructure to support e-commerce growth. This is evidenced by its 22.3% e-commerce penetration rate, which is one of the highest rates in the world, and how the UK faced an 11.4% [6] increase in internet retail sales during the pandemic (Dec 2019-May 2020). Given the rapid shift to digital shopping in the future, it is increasingly important for real estate leaders to start incorporating online retail sales into existing products in order to remain relevant to tenants in future.

Solution 1: Implementation of turnover lease agreements

To solve the problem of declining cash flows, real estate owners need to recognise the relationship between a tenant's business performance and their ability to pay rent. It is therefore crucial for real estate leaders to increase their support for tenants through the implementation of turnover-based lease agreements. Unlike traditional commercial leases, turnover lease agreements take into consideration the tenant’s commercial performance, allowing tenants to continue paying rent during economic downturns. This is an especially critical cost-reduction strategy to implement during the lockdown given the uncertainty associated with tenants’ ability to pay for rent.

There are a number of ways in which turnover rents can be structured. The most frequently used and best practices are summarised[7] as such:

A “pure turnover” lease [8]

The rent the tenant pays the landlord is calculated as a set percentage of gross turnover without any minimum base rent.

An ‘Open Market Rental Value plus turnover’ lease

The tenant pays the landlord a rent equal to the agreed Open Market Rental Value, with an additional agreed percentage of the turnover to be charged quarterly or yearly, should the tenant’s turnover exceed a stated cap.

A “Base rent plus turnover” lease

The tenant pays the landlord a reduced fixed base rent at a certain percentage of the Open Market Rental Value, with an additional agreed percentage of the turnover to be charged quarterly or yearly, should the tenant’s turnover exceed the base rent.


In the short-term, turnover rents will ease rent burdens during the pandemic, reducing the uncertainty landlords have towards retail tenants’ ability to pay rent. In the longer term, turnover lease agreements will reward landlords with rental payments in excess of what they would have received under a traditional rental payment arrangement. Additionally, the more equitable sharing of risks between both parties during economic downturns comes across as a value-added proposition for prospective tenants, boosting the demand for retail property spaces in the long-term.

Case Study 1 - CapitaLand[9]

CapitaLand Limited (CapitaLand), one of Asia's largest diversified real estate groups, presents an example of a successful implementation of the turnover rent scheme. The firm adopts an ‘Open Market Rental Value plus turnover’ lease structure which has resulted in gross turnover rent amounting to approximately 5% of the firm’s gross revenue. This strategy has played an important role in helping the firm achieve intrinsic growth, highlighting the potential of turnover-based lease structures in tiding through declining cash flows during the pandemic.

Case Study 2 - Crown Real Estate[10] and Capital & Counties (Capco)[11]

Within the UK, Crown Real Estate and Capital & Counties Properties PLC (Capco) are companies that recently offered a turnover-based lease structure for its tenants. Both groups are adopting the ‘pure turnover’ lease structure and tenants are required to pay 9% of their turnover or a percentage of the usual quarterly rent payment on a scale starting at 0% for the current period and rising to 75% by next March. This course of action emphasises the feasibility of implementing turnover lease agreements within the local context, making this strategy one that real estate leaders should strongly consider adopting in future.

Solution 2: Readjusting property portfolio

The declining value of retail property fuels negative sentiment towards the retail property market in the future, and this is attributed to the existing threat of Brexit and competitive nature of the retail industry, as well as the declining demand for retail spaces fueled by the pandemic. To reduce the risk associated with declining property values, real estate companies should adjust their property portfolios to boost balance sheet resilience. Specifically, companies should look into downsizing their retail property portfolio and start tapping into growing real estate sectors, notably healthcare real estate and industrial real estate. This strategy is especially crucial as real estate companies need to alter their operation models to reflect the post-pandemic real estate footprint.

Healthcare real estate

Total investment volumes into UK healthcare property have risen to $2.32b[12] to date in 2020, a 25% rise from 2019. This reflects the surging demand[13] for healthcare real estate providers such as mental health, learning disability and children’s services including children’s homes, foster care and schools.

Industrial real estate

Warehousing spaces will see an increase in demand given how the surge in online grocery shopping during the outbreak could be more permanent.


The current decrease in retail space is driving down the value for retail property, hence implementing this strategy means real estate leaders will be redirecting their focus away from less valuable properties. The portfolio adjustment reduces the risks associated with the declining retail property demand, ensuring that balance sheets remain resilient in future crises and enhancing the overall sustainability of the company’s earnings.

Case Study 1 - British Land[14]

British Land, a real estate company in the UK, is now in the midst of downsizing its retail property portfolio from 40% of its total portfolio to 25-30% over the medium term. This highlights an awareness towards the declining value of retail property and the potential of this strategy as a feasible way to overcome risks associated with declining retail property values.

Solution 3: E-commerce Integration

Real estate leaders also need to recognise how digital transformation in the retail industry will hamper the demand for retail property in the long term. This is an especially pressing problem for companies in the UK given the country’s strong support for e-commerce growth. Hence, real estate leaders should look into integrating e-commerce needs into its existing products to maximise the value of its offerings. These can come in 3 ways:

Adjusting premises of turnover lease agreements to account for online sales

For turnover leases to operate effectively, landlords must ensure that online sales are taken into account where they can be directly associated with the premises (e.g. online orders made from a terminal in the premises or goods ordered online and collected from the premises).

Investments into ‘Click and Collect’ infrastructure

With the growth of e-commerce, consumer preferences are now shifting toward convenience and shorter delivery times. Given this trend, we expect retail properties to transition toward smaller formats that allow for more efficient inventory management due to the limit in number of merchandise per stall.

Supporting tenants with the end-to-end e-commerce distribution

Companies can respond to the growth of e-commerce by exploring new distribution systems, forming alliances with same day delivery services to support retailers’ omni-channel strategies.


By investing in solutions that stay relevant with changing consumer trends, real estate companies can ensure that they will continue to remain relevant to its tenants. The integration of e-commerce trends in existing solutions will help real estate companies minimise the possibility of e-commerce hampering the long-term demand of retail spaces, resulting in the increase in predictability of business earnings.


Given the significant impact of the pandemic on cash flows, we recommend real estate companies put a sharper focus on reducing costs by implementing turnover-based lease agreements and readjusting its property portfolio. Both these strategies eliminate risks associated with the vulnerable nature of the retail sector, making real estate companies stronger both during the lockdown and after the lockdown.

While it is important to implement cost-reducing measures, we also recommend real estate companies leverage the trend towards e-commerce to generate long-term revenue by maximising the value of its existing lease agreements and retail properties. Given the UK's high e-commerce penetration rate, it is paramount for real-estate firms to start considering retailers’ shift in focus to online sales in their strategies. We ultimately believe that firms successful in capitalising this trend will continue to attract and retain its retail tenants in the longer-term, emerging strong in a post-pandemic era.


[1] Key contacts Nigel Shilton UK Financial Advisory Real Estate Leader (2020, April 08). Real Estate & COVID-19. Retrieved November 24, 2020, from

[2] COVID-19 Is Only Part Of The Threat Facing U.K. Real Estate Companies. (n.d.). Retrieved November 24, 2020, from

[3] Shoppers could pay more after no-deal Brexit. (2020, September 24). Retrieved November 27, 2020, from

[4] PricewaterhouseCoopers. (n.d.). Store closures: Twice the rate of last year as net decline now at highest level in five years. Retrieved November 24, 2020, from

[5] Suissa, J. (2020, April 09). REmark Report: The Impact of Covid-19 on the UK Property Market. Retrieved November 24, 2020, from

[6]Sabanoglu, T. (2020, August 27). Internet share of UK retail sales monthly 2017-2020. Retrieved November 27, 2020, from

[7] Are turnover rents the answer to accommodate the interests of both business tenants and landlords? (n.d.). Retrieved November 24, 2020, from

[8] Harrington, D., & Dean, K. (2015). Tenuous Turnover - Implications of E-commerce Growth (Rep.). Retrieved November 24, 2020, from

[9] Growth Strategies. (n.d.). Retrieved November 24, 2020, from

[10] French, P. (1970, July 20). Crown Estate to offer turnover-based rent relief. Retrieved November 24, 2020, from

[11] Mcallister, J. (2020, July 22). Landlords offer move to turnover rents. Retrieved November 24, 2020, from

[12] Saigol, L. (2020, November 16). Healthcare real estate deals in UK surge. Retrieved November 24, 2020, from

[13] Q4 to see record healthcare property investment volumes despite Covid-19. (2020, November 09). Retrieved November 24, 2020, from

[14] Our Portfolio. (n.d.). Retrieved November 24, 2020, from



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