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A plea to retailers and landlords on turnover rents

Richard Ching • 15/07/2020

It's not just about the rent 

It is really is tough out there and if you are working in leisure/F&B, that is another level of pain. From working with both retailers and landlords it is clear that neither realise how bad it is for the other. The current leasing model is broken, Covid-19 has just accelerated is demise. So, where do we go from here? 

Well turnover rents are being heralded by many, particularly retailers, as the saviour.  Well let’s be absolutely clear here, turnover rents are NOT the panacea and that is said by someone whom has spent more than a decade valuing and advising on outlet malls. The wider adoption of turnover/performance linked rents will be a positive symptom that the relationship between landlord and tenant is beginning to work again, rather than the cure. The desire by landlords, investors and crucially, banks to stick to the traditional 5 yearly upward only rent review system is hurting landlords just as much as the retailer. The current system stymies innovation and continued investment in retail destinations. Retailers will know how fast trends change in the industry. The retail leasing model needs to allow for this rapid evolution of fashions and trends.   

The change to turnover/performance leases needs to involve far more than just how we set the rent; landlords need to start thinking like retailers. A simple adoption of turnover rents is not a way of getting landlords to share the risks, only the downside. I am still perplexed by requests for turnover based rents, but an insistence in security of tenure and most of the other standard lease terms. Leases need to be shorter and simpler, both in terms of term and paperwork, (sorry lawyers), so retail destinations can be managed with innovation that is rewarded. Retailers, you should expect this from your landlords, you should encourage them to understand your business and how to support it.  Performance based rents should be the way of rewarding landlords for implementing further asset management strategies and creating place the customer wants to visit shop, live and work. However, retailers cannot expect to stay in a location if they are not performing. It is after all about sharing the risk.  

As the outlet industry shows, where asset managers employ retailers they understand their tenants, they talk the same language and it fosters great relationships. That is why we have outlet operators signing up brands and increasing occupancy during the Covid closedown.  And I am talking about hundreds of new leases in the space of 3 months, not just a few, continuing to improve their destinations. How many shopping centres have retail managers, working with the brands to ensure that the stock is right for the catchment, helping with the visual merchandising, training staff and working together to overcome problems? This is not interfering in the retailer’s business, this is understanding it and working together to achieve more. As a retailer embrace it, the landlord can be your eyes and ears on the ground. This partnership model delivered the outlet industry sales growth of around 8% last year.  Yes, there is turnover rent, but it is the flexibility of the leasing and the services provided that drives this growth. It must also be remembered, that at many of the successful outlets, there is a base rent together with service and market contributions. The base rent is set based on expected turnover and is reviewed annually, but ideally leaves room for a turnover top-up each year. The turnover rent is the incentive that provides the return on investment for the landlord.   

All this does cost money and you will note that I said contribution, because what is seldom understood about the outlet sector is the levels of continual investment by the landlords in service, marketing and fabric. However ultimately, a flexible leasing model allows the landlord to be rewarded and so they continue to invest more.  If you look at outlets, the good ones spiral upwards, with innovation a plenty.  The poor ones, well, they certainly don’t suffer a prolonged death like poor full price retail schemes….. 

So how do we move forward? 

Retailers 


Keep innovating your brand, but if you don’t then expect a new leasing structure to result in you being replaced for the benefit of the wider retail destination.  

Be generous with your data, agree to a very regular supply of turnover data, it allows an asset manager to drive the location and if you want turnover base rents, it’s only fair. Provide historic data to help the landlords with the investors, valuers and bankers.  Remember many are venturing into the unknown and need support justifying the assumptions.  Valuers and investors need data to base sensible assumptions when reporting to banks, who are trying to minimise risk.  

Be realistic with your assumptions when taking new leases. Don’t over promise sales you know are unlikely to be achieved, it undermines the partnership meaning the landlord, their investors and the banks stay highly suspicious of turnover linked rent.   

Be prepared to pay for good service. Driving down investment, just harms a location and the spiral continues. If a landlord is doing well, help them without haggling over every last penny in the service charge.  

Remember, they are not really “greedy landlords”, they are often investing your pensions, they have to drive value for the stakeholders, just as you do. 

Landlords 


Understand your customers, both the shoppers but critically the retailers. What help and support do they need to grow their business within your asset? 

Accept the need for change to leases; but take a broader view than just the rent calculation.  You own operational assets, so always look to improve them. How can you drive asset value?  It is by creating places that people want to visit, which in turn attracts retailers.  

You will need to adapt the model to suit the scheme and the retailer.  I suspect we will end up with a hybrid of leases, from turnover to fixed, valuers and banks will just have to get used to it. A destination will have to work for the new retail world to drive value, rather than a formula.  

Finally, you will notice that I have referred to turnover/performance rents.  Why does it have to be turnover, if we acknowledge the halo effect and the showrooming/brand equity piece, is it not an asset managers job to deliver you quality footfall? So why not link the rent to it?  It would get around the perennial debate on how to treat click and collect sales and returns. The key to all of this will be data. 

There is plenty to learn from the outlet industry, and not all will apply but it is much more than just the turnover based rent. It is the style of asset management, the retailing to retailers, thus creating places we all want to go. Far from doom and gloom, this could be a great time to be in retail.  

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