Speaking up for public enemy number one
I always like to be controversial, so in my first column I thought I would speak up for retailers’ public enemy number one – the landlord. Landlords are probably viewed with the same disdain as the newly disgraced bankers.
Almost 40 years ago I opened my first shop. I had to find a solicitor and he duly presented a complicated 50-page document – the lease. It frightened me but I read every word before I signed it.
As I opened more shops, reading leases almost became a full-time job. They always seemed to be drafted in landlords’ favour and contained bizarre clauses. I couldn’t cover more than 10 per cent of the windows with posters. I couldn’t use the premises for immoral purposes. I had to decorate the interior every three years with good quality lead paint. If the landlord was teetotal, perhaps there was a ban on selling alcohol.
After a while I realised I could negotiate on lease terms and we’d spend hours debating trivia such as whether I could cover 25 per cent of the window with posters instead of only 10 per cent.
The point is, I was signing a binding agreement – usually for 25 years. Nobody forced me to do it. I knew what I was getting into. In return for agreeing to their terms and conditions the landlord would grant me “quiet enjoyment” of the property.
After my first 50 shops I gave up reading leases and let my lawyer get on with it. I realised that provided I paid the rent on time the landlord wasn’t really bothered about the lease’s daft details. That was just fees for the lawyers.
Sometimes I bought a freehold. I preferred to spend my cash on fitting out shops, but if buying a freehold was the only way to get a property then sometimes I would buy it.
Having bought a property I had a policy of never selling it. Over 30 years, almost by accident, I built up a portfolio of properties worth hundreds of millions of pounds and never sold a single trading freehold.
Many times I resisted advice from City whizz-kids and professionals to sell (and leaseback) freeholds in order to release cash to “invest” in the business so I could grow faster.
It seemed to me like the family silver, and when I looked around me the strongest retailers always seemed to own the most freeholds. We’ve seen it so many times. When freeholds are stripped out of companies for short-term gain it leaves them vulnerable and the cash “invested” is usually wasted. It’s never the founding chief executive who does this, but always some short-term manager who finds himself the new boss and wants to prove how shrewd he is.
I’ve seen one new boss sell swathes of freeholds and agree penal leaseback terms with the new landlord in order to maximise value, then a few years later become a spokesman for the anti-landlord brigade complaining the terms are unfair. If I agree a deal, I like to stick to it.
I now realise that a landlord isn’t really interested in bricks and mortar. They are making a financial investment. They buy a property and usually borrow money to do it. They then rent it out to give a percentage yield on their investment. If the tenant doesn’t pay the rent they’re in trouble.
The retailer might suffer in an economic downturn, but so does the landlord. Retailers going bust and empty units with no income to pay the bank loan can put a landlord out of business. Council rates on empty properties make it worse and retailers wanting to renege on their agreements and pay rent monthly can devastate a landlord’s cash flow.
The landlord is running a business like everyone else, and it’s not always an easy business. How many owners of Woolies freeholds are small-time landlords who will be wiped out now they have no income?
The problem is, many retail analysts and City commentators know as much about property as they do about forecasting share prices. I once had a long conversation with a well-known financial journalist who was asking my views on a certain retailer that had just sold a batch of freeholds at 9.5 per cent.
I said it was total incompetence and gross mismanagement as they could easily have achieved 7.5 per cent. She couldn’t understand what I was saying and was totally convinced that a higher yield had to be good news.
And it was – but for the landlord not for the retailer, which had just received perhaps £50m less than the freeholds were actually worth at the going market rate.