Introduction to Tenant Default Risk

Across the retail property sector, the primary factor in calculating the financial return of an asset is its rental income. Therefore, gaining a detailed view and understanding of the potential risk to total income is vital when evaluating tenants within a portfolio.

• Why Is Measuring Risk Important to Retail Investors?

The UK retail sector has been significantly impacted over the last 10 years by company administrations and Company Voluntary Administration (CVAs), with 2018 even being referenced to as “The Year of the CVA” due to the number of high-profile companies using the restructuring tool to avoid insolvency.

With rising inflation, increased costs from public policy changes on National Insurance, tariff impacts and global conflict, the resilience and financial health of retailers has never been more important for investors assessing and monitoring their portfolios.

• What Retail Analytics Tools Can Help Retail Investors?

With the upcoming release of new features to Retail Analytics Pro product, Green Street will enhance its analytical offering by gaining new data on the corporate risk of national chains across the UK from Company Watch, a market leading financial risk analytics company.

Using data from Company Watch, Green Street’s Retail Analytics Pro will offer enriched data-driven scores that reveal the real financial health for UK and Ireland registered companies.

• Who is Company Watch and how do they rate financial health?

Company Watch is a UK-based specialist in financial risk and credit analysis, leveraging machine learning and public company data to help businesses predict distress, optimise due diligence, and monitor supplier.

Its flagship H Score® product rates each UK company’s financial health on a scale of 0–100, flagging those with scores below 25 as high-risk warning cases and helping foresee insolvencies before they occur.

Working with leading banks, insurers, large corporates, fraud and underwriting teams to monitor financial health, predict insolvency risk, and enrich portfolio management dashboards.

• What are the key risk factors to evaluate Tenant Default risk?

There are seven key risk factors that are considered when evaluating corporate risk:

1. Profitability – profit generation to meet its short-term commitments
2. Liquidity – liquid assets such as debtors and cash in relation to rate of expenditure
3. Stock and Debtors – management of working capital, with a preference for lower stock and debtor balances
4. Current Assets – current assets provide coverage over the company’s liabilities
5. Equity Base – company’s equity base in relation to its liabilities as reflection of their stable financial position
6. Current Funding- a higher reliance on current liabilities to finance assets is negative as it indicates liquidity risk or financial instability
7. Debt Dependency – assessment of a company’s dependence on debt to fund its tangible assets, with short term debt particularly viewed negatively given is reduced flexibility

The new and enriched metrics will soon be available in Retail Analytics Pro, providing clients with unique financial insights to help them optimise their portfolios.

Click here to learn more about Green Street's Retail Analytics Pro