European Retail Sector Needs Greater Support Amidst Pandemic
Credit rating agency Moody’s recently warned that the “perfect storm” unleashed by the potent second wave of the coronavirus pandemic threatens to hit leading shopping centre operators hard, including Hammerson, Klépierre and Unibail-Rodamco-Westfield (URW). Although the news may not come as a surprise thanks to a fresh round of lockdown measures being imposed in countries like France, Germany and England, it is particularly significant for URW, since the company faces a momentous shareholders’ vote on November 10th.
Of course, those three retail behemoths are just the tip of the iceberg when it comes to the devastating impact that the virus has had on the retail industry, with smaller enterprises facing even greater risk. Indeed, some of the gloomier predictions expect up to 40% of retailers and wholesalers in Europe to go out of business as a result of the pandemic. Given that retail contributes no small percentage of Europe’s GDP, it is incumbent on governments and investors across the continent to step in and safeguard these cornerstones of the economy, thus reviving the latter by supporting the former.
Unibail at crucial juncture
Moody’s warning is particularly applicable to URW, whose management has argued that the company’s capital structure is stretched uncomfortably thin in such an uncertain environment for the retail sector, particularly given the group’s €27.4 billion in debt. The company’s board has laid out a plan dubbed RESET, which aims to solidify Unibail’s capital structure through a €3.5 billion capital raise. The board argues that this capital increase is essential to maintaining URW’s strong investment-grade credit rating and guaranteeing access to credit markets going forwards – something which is absolutely crucial to the survival of the business.
Capital raises are a common strategy to strengthen a company’s balance sheet during a financial crisis—but the RESET plan has faced some substantial headwinds from a group of activist investors. Xavier Niel, the French telecoms billionaire, has teamed up with ex-Unibail chief Léon Bressler to purchase a roughly 5% stake in the company in order to oppose its management’s plans and try and secure URW board seats for themselves. The duo have published a 33-page critique of project RESET and proposed their alternative vision, named REFOCUS—a title that refers to Niel and Bressler’s notion that URW should unload its US-based assets to concentrate fully on its European portfolio and pay down the company’s debt with the proceeds.
URW’s management, in turn, has suggested that REFOCUS jeopardizes Unibail’s credit rating in the short term and incurs the risk of needing to sell more assets in the long term, by which time their market value could have deteriorated significantly—particularly given the fact that, as ratings agencies have already noted, selling retail properties at a fair price during a pandemic is a difficult prospect and could undervalue premium assets.
The latest announcement by Moody’s seems to support such a hypothesis, given that the agency has already made it clear that a failure to execute the capital increase would put pressure on URW’s credit rating. With a decisive in-house vote scheduled for November 10th, the board must garner a two-thirds majority for their strategy—something that’s become even more important after Moody’s detailed the tough times ahead for European shopping centres.
Sector under stress
The credit rating agency’s statement may have been particularly salient for Unibail, but it makes for concerning reading for the rest of the sector, too. The agency predicts European retail assets will lose up to 20% of their value by the end of 2021 (and up to 30% in the UK), while 8,000 net closures in the first half of this year is the highest fall on record. Almost all industries have been negatively affected by coronavirus to some degree, but the retail industry’s dependency on footfall makes the sector and its workers especially vulnerable at this most uncertain of times.
The rise in online shopping has done nothing to allay those concerns, either. In the UK, the percentage of online sales rose to 30.7% in April (up from 19.1% last year), while online retail is expected to account for 15% of all sales in continental Europe going forwards, compared to just 10% pre-pandemic. But while that increase is not an insignificant one, it does point to the fact that in-person shopping is still expected to comprise the lion’s share of sales in a post-pandemic world.
With some companies such as Inditex (the owner of high street stalwart Zara) announcing the closure of thousands of stores and some huge names in retail (like Debenhams, Oasis and Warehouse) already going into administration, there is a concern that competition in the sector could collapse. As far back as 2014, the sales of the top eight businesses worldwide already comprised almost 80% of the entire market and there are concerns that coronavirus could exacerbate that issue even further. As some retailers attempt to renegotiate cheaper leases and others fail away entirely, landlords are going to feel the burn as competition drops off and prices fall as a result.
Reviving retail key to economic turnaround
In response, European governments must act quickly to offer support to the enterprises most in need – namely, SMEs and those which rely on brick-and-mortar stores to keep themselves afloat. This can be achieved by making liquidity available to struggling firms, helping with labour supply shortfalls, encouraging customer purchasing and aiding in the transition to a more digital and sustainable infrastructure, as well as bolstering both domestic and international markets.
The importance of the retail sector should not be overlooked; according to the OECD, it accounts for approximately 5% of GDP and employs one in every 12 people in member countries. Furthermore, it plays a pivotal role not only as an employer, but also as an outlet for upstream sectors. Therefore, neglecting to provide the necessary support to keep it afloat could postpone or even prevent a timely economic turnaround from the pandemic. With that in mind, governments and investors alike should be mindful of doing more to give this hard-hit sector a leg-up on the road to recovery, since ensuring the survival of crucial parts like retail is integral to engineering the prosperity of the whole.