Commercial Property: Primrose path to liquidation: Inducements offered by shopping mall developers have often backfired

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The Independent Online
THE chances are that the only shops in the traditional high street are the humdrum stores. The real action - if there is any - is elsewhere, often in a purpose-built centre or mall on the outskirts.

This move towards US-style out-of-town shopping began in the 1980s, when retail was king. Having seen the success of the large supermarkets with petrol stations on greenfield sites, department stores and other well- known retailers paid developers a premium for space in these new malls.

Then came the 1990s, and hard times for the retailers. The tables were turned, and developers began offering tenants premiums to sign leases and enhance the capital value of their projects. This is because having the likes of Marks and Spencer and Debenhams among the tenants is seen as crucial for attracting other stores and ensuring the success of a development.

Indeed, the absence of such big names - on top of the much higher than projected building costs - was seen as a factor in the financial collapse last September of the Hatfield Galleria, with debts of more than pounds 150m.

Although Bill Watts, a chartered surveyor with Montagu Evans, says that these 'reverse premiums' were offered to only a small minority, others insist that the idea was abused.

As the recession took hold, many landlords reportedly abandoned their policy of offering inducements only to large groups such as Burton's, which could open 'anchor' stores in their developments. Instead, payments were offered to smaller groups. Some companies quickly increased the number of their outlets from a handful to more than 20, on the strength of inducements to open in large shopping centres, according to Clive Lewis, chairman of chartered surveyor Erdman Lewis.

How this system worked - and contributed to one small company's downfall - is demonstrated in a television programme to be shown this week.

In Many Happy Returns?, which starts a new series of BBC Television's 'Business Matters', Jane Walmsley follows the progress of a small gift shop company that in the first nine months of 1991 received premiums from more than 30 shopping centres, enabling it to expand from three outlets to 35.

The payments, which in some cases could amount to pounds 50,000 to pounds 100,000, were intended to be used for shop-fitting expenses. But because they were paid as lump sums with few conditions, they could be used for anything.

This finance meant small companies did not have to approach banks or other sources with detailed business plans. As a result, they could expand without having the right sort of infrastructure or other controls that would act as a check if business was not as good as expected.

For example, one of the first things The Birthday Company, the subject of the programme, did was to order lots of goods. But when the time came to pay for them, it was hit by late openings of some centres and poorer-than-expected trading in others. It collapsed, owing pounds 2m to suppliers alone.

The administrators kept the business going for a while, before selling it on to a buyer who thought he could finance the purchase with the help of reverse premiums. Not long afterwards, he also failed.

The story was 'symptomatic of a system that has effectively obscured the cash position' of small businesses, according to Ms Walmsley. But besides encouraging 'reckless expansion', it distorted the market to the detriment of both sides.

Mr Lewis said that what began as a way of improving the commercial position of shopping developments became a way of 'deferring the pain until later'. The developers should have made greater efforts to investigate the standing of the units being set up, he said.

'Business Matters' will be on BBC2 at 7.30pm on Thursday.

(Photograph omitted)