Back to business: roadmap, recovery, restructuring and real estate

Apr 14, 2021

  • 49million sq ft of chain store real estate opened vs almost 99m sq ft closed last year - what’s next for the rest of 2021?

  • CVAs and Restructuring Plans likely to feature as firms aim to recover

  • Roadmap will provide a boost, but working capital, payroll and debt pile will also feature




After a year of flux, many businesses across the UK are preparing to emerge from lockdown - in many cases leaner - primed to meet the expected surge in consumer demand. 

PwC analysis of Local Data Company statistics shows the amount of consumer-related real estate opened by chain outlets across Great Britain in 2020 was close to 49m square feet*, equivalent to 25 times the size of North East England’s Metrocentre complex,the largest shopping centre in Europe. 

However almost 99m sq ft of retail space closed - a record amount equivalent to almost 1,300 football pitches -  reflecting the pressures on chain** outlets, and by extension their landlords and wider stakeholder community. 

The significant economic pressures have accelerated restructuring activity as costs and store footprints have been put into sharp focus by the impact of lockdown and the continuing shift to online consumption. Stock, revenue, real estate and most importantly staff - the heartbeat and circulation of businesses - will all be tested as the roadmap unfolds

PwC is seeing retail and consumer-facing businesses and their stakeholders planning for the key issues ahead - the first of which is how and where they reopen.  Analysis of reopening rates after the first lockdown*** revealed that more than 30,000 non-essential chain outlets reopened, but more than 5,500 remained in temporary closure as companies considered their options. 

In advance of government support starting to taper off, all stakeholders including businesses, landlords, lenders and investors are assessing the potential reductions to city centre footfall due to changing working models and evolving consumer demand. This issue alongside the related pressures to remove costs by reviewing business estates are at the top of the agenda for the rest of 2021. 

Mark Addley, real estate restructuring partner at PwC, said: 

“Clients are dealing with a significant oversupply of retail space. Consequently we’re working with a number of businesses to reduce or repurpose their physical store portfolio. For the rest of 2021 we may see more distressed real estate in the shop window as investors and their funders with exposure to retail property look to sell these assets. The key juncture for real estate investors will come at the end of June when the ban on landlord enforcement action lifts. After assessing the impact on tenants and distressed retail values, this may be the point at which they seek to purchase retail assets, whether for repurposing or otherwise. 

 

“Landlords are willing to negotiate and support the financial sustainability of occupiers but they are dealing with liquidity issues built up over five quarters of rent arrears in some cases. Legal moves to recover rent- which actually have teeth- are a possibility from July. Also the costs and risks of repurposing remain prohibitively high for many landlords, who include local councils alongside institutional landlords, banking groups, and transport operators. In some cases it could be more cost effective to demolish and rebuild.” 

 

Bankrolling the costs of doing business in 2021

Continuing government support alongside the staggered reopening of outlets will provide a major boost for companies aiming to flourish. However, maintaining the financial momentum needed to address stock costs and run day-to-day operations while waiting for revenues to materialise from sales is set to be one of the key issues for many consumer facing businesses. 

As the economy restarts companies will need to prepare for significant pressure on working capital and cash, driven by inventory requirements, potential changes to stock delivery and cost terms and promotion agreements with suppliers. To cater for the expected rebound in demand before and during the roadmap key dates of April 12, May 17 and June 21 companies need to plan for a 20% increase in working capital requirement, PwC suggests. 


Daniel Windaus, working capital leader and PwC partner, said: 

 

“Inventory logjams represented the biggest drag on company finances in 2020, especially for retail, consumer and travel businesses. By the end of Q2 2020 stock was sitting in UK warehouses for up to 10 weeks in some cases before being sold according to our tracking of working capital trends.Therefore, being able to manage stock accurately despite a genuine element of uncertainty about demand will be key, especially with longer lead times tending to also drive increased stock holding, forward buying commitments, and volatile seasonal demand. 

“Even the weather will play a more significant role than normal as the roadmap unfolds. Hospitality and retail clothing and footwear are particularly exposed to working capital pressures. Inventory planning will also be crucial for airlines due to fuel and catering demands.” 

 

Claire Fox, operational restructuring partner at PwC, said: 

 

“Many companies face the ultimate balancing act over the next few months. For the retailers, they must consider how they ‘rightsize’ the cost base where necessary while still maximising revenues. It’s not as simple as closing down a store because there are still inventory and back office considerations to factor in. Less outlets relieves costs on one front but it doesn't necessarily mean a significant drop in activity for the support teams, or in the delivery centres. 

“For pubs and restaurants, especially smaller outlets, difficult decisions will be made around the cost benefit of operating a smaller proportion of their businesses while social distancing remains.  

“Looking forward, any business that decides to remain closed until restrictions are lifted further will be considering the impact of those limited revenues as they restock for opening and aim to buffer the effects of government support being unwound. 

“In general, further restructuring is highly likely.”   

 

The changing face of restructuring mechanisms in 2021? 

 

2021 is set to see a continued focus on restructuring processes with further significant review of rental terms. During 2020, 29 CVAs of retail hospitality and leisure businesses with £25m+ turnovers impacted around 4,200 leasehold sites, according to PwC analysis. Almost 2 in 5 businesses  (37%) held between 5 and 10 categories of leases. 

 

However, only around 500 of those sites were set to be exited, reflecting the emphasis on landlords agreeing changes to rental terms or writing off arrears, allowing businesses to preserve jobs in many cases. Four further CVAs have been announced in early 2021 which cover another 800 sites. 

 

For the rest of 2021 there could be a shift towards newer forms of restructuring due to an unintended consequence of the liabilities which have built up. Landlords’ voting powers have been strengthened in CVAs due to the level of outstanding claims caused by rental arrears. 

 

For this reason, the use of Restructuring Plans may increase alongside Company Voluntary Arrangements especially before the ban on landlord enforcement actions is lifted at the end of June. The prospect of insolvency always looms given the balance sheet position of many companies and the level of arrears. However, the reopening of the economy alongside the resilience of UK businesses means that alternative options are available. 

 

David Baxendale, restructuring partner at PwC, said: 

 

“It’s impossible to predict the shape and speed of recovery for UK businesses. However, the reopening of traditional commerce will undoubtedly provide a major boost. 

 

“Rents,  tax and payroll runs will all return as the roadmap unfolds, as will the ability of creditors to issue  winding up petitions. Perhaps now more than at any previous time, every penny counts as businesses try to maximise the revenues needed to offset the cash outlay on stock, reopening, staff, and servicing debts accumulated over the last year. Those who operate across the UK will also have to factor in different roadmap timelines across the home nations.

 

“If restructuring is needed then there may be a rise in activity before the ban on creditor actions lifts at the end of June. Consequently early May will be the time that CVAs or Restructuring Plans would have to be in place in order to take effect ahead of the insolvency laws becoming more stringent.” 

ENDS

Notes to editors:

 

* Data compiled by the Local Data Company on behalf of PwC

** Outlets of operators with more than 5 stores in their estate 

*** https://www.pwc.co.uk/press-room/press-releases/restructuring-lockdown-survival-strategies.html






 

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