Retail & Covid-19. Considerations for Banks and Owners

Milan, 7 May 2020

Dear Friends,

The customer is always right. Evolving and adapting to new consumer trends, formats and environments has always been a challenge for many retailers, retail owners and lenders. Like many other shocks, Covid-19 is changing consumer behaviour and has accelerated recent trends.

Shopping online and home delivery is creating additional pressure on retailers and retail owners to create a compelling argument as to why consumers should visit a shop, high street or shopping centre or buy anything at all in the current situation.

For retailers, shutting the door was easy. Managing personnel and stock will have been a challenge. Re-opening and winning back customers will take longer and will require a focus on business basics – product, message and clients – to re-build sustainable retail concepts. Many retailers have seen sales fall to zero, while supermarkets and some local small-town grocery stores have experienced the opposite, with sales increases of up to 30% and consumer behaviour commensurate to that of the 1950’s – shopping in the morning and then getting on with one’s isolation business (tea in the garden or a game of Call of Duty) in the afternoon. Most sustainable, well managed retail businesses are able to adapt to new trends over time. However, sharp, sudden shocks of this magnitude cannot be planned for. Luxury retail will be particularly hit given its reliance on travel and tourism, but the majority will survive. Zombie retailers that should have gone out of business years ago that have simply survived on low interest rates, debt riddled balance sheets and easy consumer credit, probably will not. As we emerge from lockdown, some retailers will be in a better position than others. Discretionary spending is likely to reduce. Some retailers will be better placed to capture demand. Many will go bankrupt.

The summary below is an overview of the current key considerations and challenges faced by both lenders and retail owners:

Lenders – Develop Strategic Alternatives

A harsh recession could finish off many retail formats (and retailers), putting borrowers on course for default or debt restructuring. Lenders should evaluate strategic alternatives rather than just take the default option of extending loans and hoping for the best. Lenders are in a challenging position, as in many cases they have or will become the beneficial owners of assets they do not have the organizational structure and expertise to take control of.

Banks should start preparing now for onboarding retail assets. Assets deemed to be the least suitable for loan restructuring will likely be those that are most adversely impacted.  (older, less dominant retail schemes or redundant retail formats). Many retailers will likely go into administration, increasing occupancy and income voids, and resulting in loan defaults. Some owners may decide to just walk away and hand the keys to the lender, and others may, out of desperation, try to renegotiate or delay debt enforcement.  In most cases, banks need to develop strategic alternatives, and be prepared to take control of and manage these assets. 

As they anticipate the cascade of defaults in their retail exposures, banks should take immediate steps to prepare and respond, including:

1.     Segment the book by borrower/owner – professional vs non-professional, likely survivors and non-survivors, considering i) How are they managing their retail positions in the current situation? ii) Have they been investing in their schemes during the crisis? iii) Do they have a plan for re-opening, and a clear approach for reducing the related risks?;

2. Segment the book by retail type/location/competitive position, and differentiate the positions that will likely be affected in the short/medium term and those that are likely to have longer term issues;

3.     Identify high risk borrowers and properties – assume these properties will ultimately need to be onboarded by the lender;

4.     Assume some owners will go into insolvency, and have a back-up plan for operations;

5.     Develop a decision tree and work-out plan for each asset;

6.     Prepare asset-level business plans before onboarding to accelerate repositioning and a sale;

7.     Be prepared to consider alternative uses for redundant concepts;

8.     Develop multiple exit strategies for each asset;

9.     Create an onboarding team and operational capability (internal or outsourced) to take control and manage repossessed assets;

Lenders who act quickly will limit the damage by being in a position to monetize their assets before their competitors, thereby maximizing recoveries and minimizing provisions.  Banks therefore need to be hyper-proactive in managing their retail exposures, as there are numerous operational and competitive threats that can erode the value of their collateral very quickly.


With the majority of retail closed, managing rents is a key issue for retail owners. Many retailers (with little regard to lease contracts) have requested deferrals, discounts or simply refused to pay rent, turning payments into a flexible (potentially cancellable) costs. As a result, there are some immediate actions retail owners should take if their properties are closed. They should:

1.     Focus on reducing operational costs of the retail centre with service providers and in turn the service charge paid by tenants;

2.     Monitor Government advice and timings regarding re-opening and be prepared to safety re-open centres while complying with all health and safety regulations (e.g. limiting visitor numbers, waiting lines, social distancing/density communication, hand sanitizer stations, regular in-depth cleaning, wearing masks and use of fresh rather than recycled air etc) as soon as permitted by local authorities;

3.     Move (even temporarily) to billing monthly where not already doing so. Communicate and support tenants through the crisis, prioritising those that need the most help, such as small and medium sized operators through rent relief and/or deferral and actively manage invoicing vs. collection expectations (and VAT obligations);

4.     Review tenant credit risk registers and develop alternative leasing strategies for units at most risk;

5.     Plan for regular property maintenance to prevent deterioration during the lockdown while reviewing CAPEX plans and deferring discretionary initiatives for 2020;

6.     Manage communications with wider consumers and consider engagement in solidarity actions in support of the communities within the catchment area of the asset;

7.     Negotiate forbearance with lenders;

8.     Review insurance policies for business interruption coverage;

9.     Communicate regularly with any furloughed staff, so they can be remobilized quickly;

The different types of retail owners should be differentiated in this new environment. The professionally managed and well capitalized retail owners will survive, but the non-professional and poorly capitalized owners will not. Those in between will struggle.


The next few months will be challenging. The extent of the damage to retail owners will depend on consumer behaviour, spending power and the knock-on effect to key tenants. The most negatively impacted will be the retail owners of less dominant, poorly managed and/or simply redundant formats that were facing existential challenges long before the pandemic-induced lockdown began.

Many retail assets will become distressed through an increase in vacancy and void lengths due to decreased tenant demand resulting in the inability to service operating costs and debt, which will have a material and adverse effect on capital values in the near term. 

Rather than dwelling on uncertainty and hope, a focus on sustainable asset strategies and detailed risk management plans will separate the strong from the weak.  

As people sit isolated at home with access to the world at their fingertips, the retailers and retail owners who survive and end up thriving will be those that are able to offer the customer a good reason or experience to come to their store or centre other than to simply buy an item.


Daniel Smith
Tel: +44 (0) 7834 572 842

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