Rump Praktiker stores limp on through insolvency process
The collapse of the Praktiker DIY chain in Germany, along with its more upmarket subsidiary Max Bahr, has been the big story in German retail and retail real estate over the summer months. REFIRE has reported on the insolvency and the emergence of possible solutions for landlords and financing banks as the unwinding of the chain progresses. What’s becoming clear is just how regionally differentiated individual approaches to salvaging value from the condemned chain are becoming.
First, the latest trading status of the home improvement chain. In 51 of the poorest-performing Praktiker stores across Germany, the month of August saw the introduction of “Everything Must Go” sales, offering hefty discounts on the stores’ usual array of products. The sales are scheduled to end on October 1st, although reports suggest that some stores have already sold out of everything and have closed. The rationale here is that investors are more likely to be drawn to empty stores than those still limping along. Most of these stores are not considered good candidates for further operation as DIY stores.
According to insolvency administrator Christopher Seagon, “An empty store is more attractive to an investor from another retail sector than one with goods still to sell”.
The remaining Praktiker stores are thought much more likely to have a good future as a DIY store under a reconstituted Praktiker/Max Bahr organization, and suppliers are continuing to deliver products and provide credit under the administrator’s guidance. “A number of strategic and private equity investors have expressed interest in taking over the Praktiker/Max Bahr group”, says Seagon, with concrete offers expected early in September.
Since the collapse of Praktiker on July 11th, retail specialists have been much in demand to explain how such bankruptcies come about and what investors can do to protect themselves against such fallouts in the future. REFIRE asked Dr Angelus Bernreuther, the head of location research at specialist retail advisory BBE Handelsberatung, which we profiled in these pages a few months ago, what lessons can be learned from the current Praktiker insolvency.
REFIRE: Qualitative factors have clearly played a role in the Praktiker collapse, particularly the belief by the chain that a low price is enough to keep the punters streaming in. Did many investors ignore this?
Dr. Bernreuther: Many investors focus primarily on cash flow quality, in other words the lease contracts priced into the property. However, cash flow quality is an output of the factors of location, market and property and not the other way round. Changes in these factors will sooner or later have a direct impact on cash flows – resulting in vacancy in the worst-case scenario.
The shorter the remaining lease term, the higher the priority these qualitative factors must be given in the due diligence process. This is because it is the qualitative aspects that determine to a large extent the level of sustainability of a location or a retail property.
Are investors overly concerned with location and centrality, for example?
Certainly the location aspect still gets quite a lot of attention in relative terms. After all, word has spread that, for example, it may be misleading to view the purchasing power and centrality indicators in isolation, and the way these figures have been arrived at should always be queried. Building permit restrictions that affect possible alternative uses receive a rather more cursory treatment, because the ten-, twelve-, or even fifteen-year lease term significantly exceeds the investor's own investment horizon of five or maybe seven years.
The Praktiker insolvency will have taught many investors a bitter lesson in this regard. Only a small handful of locations will have a future as DIY stores, because there is an oversupply of such stores in Germany. Because of the land-use plan, this often leaves conversion to another retail range, without inner-city relevance, as the only alternative. But subsequent conversion to a different type of use – for example as a furniture store – would probably entail a significant drop in rent. Because of the impact this would have on returns and property values, such a move would make neither the financing bank nor the investors very happy.
What would help investors to foresee such later difficulties?
We would always emphasise to investors that here’s where it becomes clear that the special requirements of users, the way the properties are built and the often quite limited options for subsequent use make it more expedient to treat retail properties as operator-managed properties. Since they are often tailored to a specific first occupant, the group from which a subsequent occupant can be selected may be rather small.
Apart from DIY stores, another very topical example is inner-city department stores: the lack of suitable tenants means that it may be quite hard to find a successor to take the space. Similarly, electronics stores, which currently do very well on the upper floors of shopping centres, pose a considerable re-leasing risk in the medium term. As is common for operator-managed real estate, it should be an essential part of the due diligence process that experts also carefully analyse the business concept of the retail company leasing the premises and assess its future viability in order to get a clearer idea of the sustainability of the venture.
Only if the tenant's strategy seems promising for the long term, for example because it has sufficient market share, boasts a contemporary multi-channel concept, and is positioned clearly in its competitive environment, is it possible to make a robust assessment of whether the location, the property and the tenant are in fact compatible for the long term.