Covenant strength in shopping centres: a diversified risk?

Publication Date11 Jul 2008
AuthorNorman Hutchison,Alastair Adair,Julie McWilliam
SubjectProperty management & built environment
Covenant strength in shopping
centres: a diversified risk?
Norman Hutchison
Centre for Property Research, Business School, University of Aberdeen,
Aberdeen, UK
Alastair Adair
Centre for Research on Property and Planning, School of the Built Environment,
University of Ulster, Ulster, UK, and
Julie McWilliam
Drivers Jonas, Glasgow, UK
Purpose – The paper has two aims: to consider the volatility of the covenant strength risk ratings
among the top 25 retailers in the UK over the period 2002 to 2006 and to devise a risk scoring model for
evaluating covenant strength in shopping centres.
Design/methodology/approach – In a shopping centre the risk of tenant default on rental
payments is spread over a number of tenants. It is often imagined that this is well diversified risk, but
between shopping centres there are differences in the tenant mix and thus in the overall reliability of
the cash flow of the investment. However, often information on the overall covenant strength risk score
is not available and important differences between shopping centres ignored. This paper analyses
credit risk scores of the top 25 retailers in the UK over the period 2002 to 2006 using data supplied by
ICC. In addition, case studies of three shopping centres are used to illustrate the use of a covenant
strength risk scoring model.
Findings – The analysis demonstrates that within the top 25 retailers significant variations in
covenant strength present financial risks to investors highlighting the added value that credit
reporting can provide for clients. In addition, the case studies emphasise how tenant change and
vacancies can impact the overall risk profile of shopping centres, a finding that would have added
significance in secondary locations.
Practical implications Themethodology could be applied by investors to give an overall view of
the default risk of a multi-let investment and allow comparison between shopping centres facilitating
dynamic analysis on an ongoing basis.
Originality/value – The explicit contribution of risk factors, such as covenant strength, to the initial
yield does not have a major coverage in the literature. This analysis has the potential to identify at an
early stage areas of potential default and thus enhance the decision-making process.
Keywords Risk analysis,Covenants, Shopping centres, United Kingdom
Paper type Research paper
1. Introduction
One of the most important aims of all shopping centres managers, is to successfully
combine tenants of strong financial standing with a distinctive retailing offer that will
encourage footfall (Kirkup and Rafiq, 1994). This objective is not without its challenges
and side effects in its implementation. Landlords require a return on their investment
and are looking for long-term reliability of income flow and as a consequence focus on
The current issue and full text archive of this journal is available at
Received December 2007
Accepted March 2008
Journal of Property Investment &
Vol. 26 No. 4, 2008
pp. 329-341
qEmerald Group Publishing Limited
DOI 10.1108/14635780810886636

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