The stress on UK high streets is growing, as indebted consumers curb spending and buy more goods online. Mothercare has become the latest retailer to say it will have to restructure its rents. April's 3.1 percent year-on-year fall in retail sales was the sharpest drop since records began in 1995, while the 4.8 percent fall in the number of people visiting shops in March and April was the biggest bi-monthly drop on record, according to the British Retail Consortium.
The pain hasn't yet caused a surge in the number of vacant shops. Occupancy rates for the retail sector are about 88 percent, according to property consultancy Knight Frank, having held steady for the past two years. That's roughly in line with the average since 2008.
Landlords have had to become more flexible. They are attracting retailers by offering leases with rent-free periods of up to ten months. Accounting rules help by allowing companies to book lease payments as revenue before it is paid, and to spread the loss of income from an initial discount over the term of the lease. That has kept up reported rental revenue.
Landlords are also taking more risk, according to property company executives. They are allowing cash-strapped retailers to pay rent only one month in advance rather than three. Retailers are also asking them to make rents more flexible, by adjusting payments if sales decline, or including more break clauses.
Landlords may only be able to paper over the cracks for so long. Property companies say their list of troubled tenants is growing. There's a risk that when companies reach the end of their discount periods, landlords will be forced to extend them further, or offer rent reductions.
Markets are already pricing in quite a lot of pain. UK listed real estate trusts are on average trading at a discount of 30 percent to their reported net asset values, twice the historic average, according to Jefferies analysts. Yet, with the pain on the high street still spreading, it may only be getting started for commercial property values.