What went wrong with BHS's mega property portfolio?

Richard Grossman, a director at retail property agent Lewis Craig, suggests Chappell and his team got in over their heads because of their lack of big estate experience.

He explains: “The issue here is that the owners seriously underestimated the enormity of the task of rationalising the store portfolio, at the same time struggling to reposition the brand, all with the backdrop of running out of cash.”

Grossman adds that the exercise of downsizing and extracting value from the estate “was never going to happen overnight, this process can take years”.

As Cushman & Wakefield retail head Justin Taylor puts it: “Property can be a hard game to play and transactions can often be complex, involving shared ownership. Deals take time.”

Taylor agrees with Grossman that the Retail Acquisitions team was naïve with its property ambitions. “Those who are not property specialists often wrongly assume all real estate is worth its weight in gold,” he says.

“Retail Acquisitions probably thought they could raise quite a bit of money rapidly from the BHS store portfolio. While they had some success, I don’t think they were expecting the reality.”

But there were deeper property problems. Chunks of the estate were deemed too big by some potential buyers and by retailers who have been focusing on opening small shops. Cushman & Wakefield says 8% of BHS stores are classified as prime or easy to let.

But more tellingly, the figures also show that 26% of them could lie empty for months in the present market. Gregor Wallace, a senior director at BNP Paribas Real Estate, notes: “Some of the store locations may now have been usurped by larger and newer shopping centres, which have pulled pedestrian traffic away.”

Experts also observe that the retailer was trying to offload assets in the midst of a tough real-estate market. Recent figures show worries over the world economy and a possible Brexit triggered an £8 billion slump in spending on UK commercial property in the first three months of 2016. Wallace says: “Brexit is not helpful to the property market. As we know, uncertainty always brings moments of pause while people understand the impacts.”The dampened mood in the British property sector could send chills down to some affected landlords (see box below).

Although BHS is still trading, some of them already have plans under way to cope with a time without rent if BHS stores close.

But others claim they can get new businesses to sign up to any space BHS exits. AIM-listed NewRiver Retail says it is confident it has leasing arrangements in the pipeline that will “represent higher quality in the future”. Land Securities reports that it has well-developed plans for the space.

Meanwhile, Standard Life Investments, which lets property to BHS in places such as Basildon and Crawley, is “working closely with administrators to find the best solution for our assets and investors”, says head of UK retail Ed Jenkins. He adds: “While this situation is very unfortunate, we were aware of the scale of the problem that the company was facing during the CVA process.”

About 50 companies are understood to have expressed an interest in snapping up BHS but the latest property figures could dampen hopes that a white knight will swoop in to buy all of the business. Instead, the assets could be sold off piecemeal.

While some leases could prove tricky to sell, agent JLL is confident landlords in London have less to worry about. Damian Sumner, its head of retail agency, believes discounters such as Aldi and Lidl, which are growing aggressively in the capital, would be attracted to a number of BHS locations.

He adds that they would also be desirable to chains wanting to take advantage of planning and trading permissions in place at some BHS shops to sell food or operate a café.

Although talks with Mike Ashley’s Sports Direct to buy some of the stores collapsed over the weekend, some agents believe it could look again to buy some of the portfolio now that it will not have to take on a pension burden.

Peacocks and Edinburgh Woollen Mill tycoon Philip Day is also eyeing stores.

But Neil Saunders, retail analyst at Conlumino, is concerned about any wider store closures for both the tough retail market and the retail landlord market.

“While BHS may not have been the most attractive retailer, having it is far better than having a retail gap,” he says. Although some of the chain’s assets will be attractive, many more will be viewed as ugly.

If Retail Acquisitions’ failed property play is anything to go by, a number of landlords could have a tough time finding occupiers to fill the gaps left by the demise of BHS.