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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)
Julie McWilliam (Drivers Jonas, Glasgow, UK)

Journal of Property Investment & Finance

ISSN: 1463-578X

Article publication date: 11 July 2008




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.


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.


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

The methodology 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.


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.



Hutchison, N., Adair, A. and McWilliam, J. (2008), "Covenant strength in shopping centres: a diversified risk?", Journal of Property Investment & Finance, Vol. 26 No. 4, pp. 329-341.



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Copyright © 2008, Emerald Group Publishing Limited

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