Coeur de Lion
advertisement
Coeur de Lion
advertisement
Coeur de Lion
advertisement
Goto your account

Feature Stories














Seeing Eye to Eye: Retail Rent Review

INCLUDES NEGOTIATION CHECKLIST: The COVID-19 pandemic has caused the bubbling tension between retailers and landlords to boil over – but the crisis has cleared the way for a new paradigm, writes ARABELLA RODEN.

BY THE NUMBERS
RETAIL REALITY


- $3.6 billion

loss recorded by Scentre Group, Australia's largest shopping centre landlord, January – June 2020
Scentre Group Half-Yearly Report, August 2020
________


- 8.1%

overall retail precinct footfall decline, 2017–2020
KPMG, Beyond COVID-19: The Shifting Foundations of Retail Property
________


4 - 5%

average yearly increase in retail rental cost
Simon Fonteyn analysis

_________

1,338

shopping centres
in Australia

The Retail Doctor Group

_________

5.1%

vacancy rate in shopping centres, June 2020 – a
20-year peak

JLL Australia

_________

12%

proportion of Australian retail sales that took
place online in March 2020

Australia Post, 2020 eCommerce Industry Report

Leasing premises is one of the highest fixed costs associated with traditional retail, alongside staff. Yet unlike staff contracts, lease agreements are largely inflexible – often with fixed minimum terms of five years – and can increase beyond inflation for years at a time regardless of trading conditions, demanding tenants sacrifice margin or constantly increase sales.

During good economic times, these fixed terms were somewhat tolerable for businesses. However, the retail environment has become increasingly challenging in recent years; changing consumer habits, shrinking margins, and increased competition have all served to erode profitability.

Simon Fonteyn, managing director of retail leasing data firm LeaseInfo Group, says, “Over the past five years, there has been an increasing amount of capital required for retailers to do business. In terms of leasing structures, rents have generally been outstripping sales. Typically, rents have escalated between 4–5 per cent per annum, whereas retail sales have increased by, on average, 2 per cent per year.”

Fonteyn says there was already a “shake-out” occurring in the sector prior to the COVID-19 pandemic, pointing to the high-profile collapse of several fashion and footwear retailers – such as Bardot, Ed Harry, and Ziera – in 2019. 

The arrival of the virus in January 2020 “accelerated and amplified cracks that were already visible” in the retail sector, according to the KPMG white paper Beyond COVID-19: The Shifting Foundations in Retail Property, which was published this June.

“Retail precinct footfall had been in decline for years as e-commerce penetration grew – recording 8.1 percent in cumulative footfall losses over the three years to 2020. Retailer profit margins and retail landlord yields were being squeezed since 2017 and consumer confidence had been in decline for most of 2019,” the paper’s authors note.

By mid-year, the Australian economy was in recession for the first time in nearly three decades, and the effective unemployment rate had reached 13 per cent, according to Federal Treasurer Josh Frydenberg.

Consumer spending see-sawed, with the Australian Bureau of Statistics (ABS) recording the most precipitous fall and meteoric rise in retail trade figures consecutively in April and May.

At the same time, foot traffic at shopping centres and retail precincts collapsed by up to 80 per cent, leaving businesses out in the cold.

In the midst of the unforeseen and turbulent conditions precipitated by the virus, Paul Zahra, CEO of the Australian Retailers Association, notes that some landlords have been unwilling to accept this new reality.

“The challenges endured by retailers over the course of the pandemic have put a spotlight on the high cost of rents,” he explains.

» Download: Jeweller's Rent Negotiation Checklist

“Unsustainable annual increases to rent have been a persistent problem for some time now, with rents far outpacing revenue growth amid a changing retail environment. We expect many stores will require ongoing rent relief to help them recover – and when retailers win, landlords win.

“Landlords need to remember that we are in a recession. It’s a false economy for landlords to try to extract rent from retailers that need cash reserves to survive,” he adds.

Indeed, Scentre Group, Australia's largest shopping centre landlord, recorded a $3.6 billion loss in the first half of the year, including a $4 billion reduction in the value of its property portfolio.

Paul Zahra, Australian Retailers Association
Paul Zahra, Australian Retailers Association
“Unsustainable annual increases to rent have been a persistent problem for some time now, with rents far outpacing revenue growth amid a changing retail environment.”
Paul Zahra, Australian Retailers Association

Notably, while it was able to successfully reach rent agreements with thousands of tenants, negotiations with Mosaic Group – which owns Rivers, Katies, and Noni B, and is a long-term tenant – collapsed this month, resulting in the temporary closure of 129 stores by Scentre Group. 

Peter Ryan, director of retail strategy firm Red Communication, predicts that retailers will be in ‘survival mode’ for at least the next two years as a result of the pandemic. “Foot traffic is down, there has been a ‘forced’ shift to online retail, and sales and margin are under enormous pressure,” he says.

“As household disposable incomes succumb to economic pressure, stores will be subjected to intense pressure – some of it appropriate, a lot of it unwarranted. Lease costs and inclusions must be reduced or they run the risk of becoming uneconomic.

“No retailer will be able to support high rents any longer and therefore renegotiating terms is a critical success factor both in terms of survival and growth,” Ryan says.

It’s a conclusion supported by the KPMG paper, which notes, “Even if COVID-19 is quickly resolved, retailers and landlords will need to ‘lean in’ to create a new and more sustainable retail business model, which in turn will require adaptations to the property model.”

Given the impact of the pandemic, the questions to be answered remain: what will the retailer-landlord relationship look like, post-COVID, and how can retailers shift the balance toward more favourable terms?

Examining the retail landscape

According to analysis by the Retail Doctor Group’s Brian Walker, Australia has 1,338 shopping centres, which comprise 85 per cent of stores and attract 85 per cent of overall shopping visitation.

These shopping centres are, in the main, owned and operated by real estate companies including Scentre Group, Vicinity Centres, and Stockland, many of which are publicly traded.

Ideally, the relationship between retailer and landlord is one of mutual benefit; while the latter collects rental income, the former is meant to enjoy increased and high-quality footfall as well as reduced occupancy cost.

Yet it is not always so. Frank Salera, director Salera’s – a jewellery chain which has been dealing with landlords since 1953 and operates 20 stores across Victoria and Queensland – observes, “The key challenge is that landlords seek to maximise the returns to their shareholders, who expect year-upon-year increases – and this objective is irrespective of the challenges of increasing retail performance, which is often declining.

“Shopping centres have tried, generally, to change the mix to ‘experiential’ retailing – lifestyle precincts, casual dining precincts, gyms – and away from more traditional retail... Unfortunately that has backfired during COVID-19 because experiential retail has been hardest hit.””
Brian Fonteyn, LeaseInfo Group

“This results in a situation where now, more than ever, retailers are required to ‘throw the keys on the table’ [threaten to vacate] before the landlords will consider a rent that affords the retailer a minimum return on investment.”

It’s a perspective shared by Balaji Sambasivam, chief financial officer of large chain The Jewellery Group (TJG), which operates 67 stores under the Mazzuchelli’s and Zamels brands. Notably, TJG’s store count has decreased dramatically since 2010, when it operated more than 120 stores.

When asked about the challenges of negotiating leasing agreements, he said, “Landlords were unilaterally considering only their property valuation and returns, with less scope to look at the retailer’s commercial viability of operating the store.”

He added, “There was lots of pushback in negotiating the multiple stores as one portfolio, as they were stating that each store has different cost dynamics and the owners’ expectations were different.”

When negotiating the terms of a lease, the retailer has historically been at a disadvantage, with Ryan noting that retailers have often had to supply trading information to landlords “only for them to turn around and use that information to negotiate onerous terms based on a percent-of-sales formula”.


Zahra also describes another “information imbalance”: “Smaller retailers, in particular, don’t fully know their rights and what they can ask for. Landlords are in the business of collecting rent, whereas for retailers, rent is just one of many parts of the business they need to manage.”

Additionally, many Australian states and territories have required a minimum five-year term for commercial leases. While providing stability for retailers and security for landlords, these terms have made it more challenging for retailers to respond to downturns.

As a result, several states have taken steps to amend the legislation governing commercial leases.

“In NSW, which accounts for about a third of all Australian retail, there used to be a requirement of minimum five-year terms, but that has now changed [with legislation passed in 2017],” Fonteyn explains.

In South Australia, amendments to the Retail And Commercial Leases Act came into force in June and have streamlined the process for acquiring a certified exclusionary clause to shorten a lease term.

The changes also provide added protection and reduce confusion for small and medium retail tenants. John Chapman, South Australian Small Business Commissioner, explains that the amendments resulted from a lengthy period of consultation and an independent judicial review.

“Some of the changes that have flowed through include that landlords will be required to provide prospective tenants with a disclosure statement and a draft lease as soon as negotiations commence,” Chapman says.

“What that is aiming to do is make sure people have as much information up front so they can go away and think about it early. That provides transparency around the stages of negotiation.”

Additionally, the South Australian Small Business Commission has produced a Retail Commercial Leasing Guide, which is now required to be provided to prospective tenants.

“This document is very much aimed at helping tenants understand their obligations and what a lease may contain, with frequently-asked-questions and indeed tips on what to look out for,” Chapman says.

Other changes include a “significant increase” in penalties for parties “not providing the right information or doing the right thing, or seeking information they are not required to,” according to Chapman. These penalties had not been updated since 1995.

In the past five years, Fonteyn notes that shopping centre landlords have also made significant efforts to improve footfall, namely by shifting the retail mix toward services and lifestyle.

“Shopping centres have tried, generally, to change the mix to ‘experiential’ retailing – lifestyle precincts, casual dining precincts, gyms – and away from more traditional retail like apparel and footwear. Unfortunately that has backfired during COVID-19 because experiential retail has been hardest hit,” he explains.

“Centres have also become more ‘all hours’ – opening early and closing late – and they appeal to different types of shoppers throughout the day.”

It’s a trend Salera has also observed: “With or without COVID, the centres have spent the last few years in considering how to maintain centres as a hub of consumer activity. In the past, specialty retailers and department stores formed the basis of attracting shoppers to centres, which then created a demand for food and lifestyle – such as cinemas.

“The apparent trend is that now landlord owners are focusing on food and lifestyle as the primary attraction for consumers, who will then frequent the specialty stores.”

As Fonteyn notes, the viability of the lifestyle-driven strategy has been significantly hampered by COVID-19, at least in the short-term. Whether footfall will recover to previous levels remains to be seen, given that COVID-19 has also accelerated another major retail trend of the past five years: e-commerce.

Facing the headwinds

COVID-19 dealt a devastating blow to the Australian economy, plunging it into recession and increasing the official unemployment rate to 7.5 per cent, its highest level in 22 years.

At the same time, shopping centre footfall declined by more than 80 per cent in 2020, when compared with 2019, during the nationwide lockdown. It remains about 20 per cent lower in states that have emerged from restrictions, according to data from ShopperTrak.

“The higher the footfall, the more time consumers dwell and the more confident consumers are in their financial wellbeing, the more money they spend with retailers, who can then pay rent to landlords and make a profit.

“The COVID-19 physical distancing measures and the resulting recession work against all three of these value drivers – footfall, dwell times and consumer confidence,” notes the KPMG white paper.

For practical reasons, consumers increasingly turned to e-commerce while under lockdown and have adapted to its convenience. The Australian Financial Review reported that in August 2020, e-commerce sales increased 56 per cent for omni-channel retailers when compared with April 2019. For online-only retailers, the figure was 109 per cent.

The shift – however temporary – away from bricks-and-mortar shopping has placed significant pressure on retailers and landlords alike.

Vicinity Centres – which operates 60 shopping centres across Australia, including Melbourne’s Chadstone and Chatswood Chase in Sydney – was recently forced to launch a $1.4 billion capital raising to mitigate the decline in rental income, while its overall real estate portfolio declined in value by $1.8 billion for the first half of the year.

While retail sales fell a record 17.7 per cent in April due to widespread lockdowns, the figure rebounded 16.3 per cent in May as government stimulus flowed through to consumers and businesses, before stabilising in June.

However, the spending was largely concentrated in necessities such as groceries, hardware, and homewares. Fonteyn said the jewellery category had been “heavily impacted”, though urban areas had again borne most of the brunt.

With bricks-and-mortar retailers across discretionary categories in dire straits, the necessity of rent reductions, waivers, and deferrals became clear.

“Meeting rental obligations is a significant concern for retailers, with many stores still suffering diminished revenue, particularly discretionary retailers and stores in CBD or tourist-dependent locations,” Zahra says, adding that retailers would also incur costs due to COVID-19 safety requirements.

On 7 April, the National Cabinet released a Commercial Tenancy Code of Conduct to guide good-faith rent renegotiations between retailers and landlords.

At the time, Peter Allen, CEO of Westfield owner Scentre Group and chairman of the Shopping Centre Council of Australia (SCCA), said, “We all accept that retail leases are legal obligations and enshrined in the laws of the states and territories, yet we are also commercial people and we understand there needs to be many factors taken into consideration as we come to an agreement on temporary arrangements.

“Our aim is, in a proportionate and measured way, to share the financial risk and cash flow impact during the COVID-19 [pandemic] with the interests of all our stakeholders.”

Between March and May, SCCA members were able to complete more than 6,400 revised rent agreements with small and medium-sized retailers, representing approximately 45 per cent of those who had requested relief.

As of 14 August, the SCCA’s assistance extended to retail tenants totalled $1.6 billion.

Angus Nardi, executive director SCCA, said, “Our industry has provided substantial rental assistance to both SME [small-and-medium enterprise] and non-SME retailers... We have strived to strike a balance between helping those who need it while
at the same time confronting our own financial pressures in the face of ongoing disruptions to regular trading to protect public health.”

He added that SCCA members would continue “working closely and co-operatively” with SMEs, saying, “It is in our commerical interests as well as the broader economy that SMEs have longevity within our centres as they provide products and services our customers want and support local jobs.”

Angus Nardi, Shopping Centre Council
Angus Nardi, Shopping Centre Council
“It is in our commercial interests as well as the broader economy that SMEs have longevity within our centres as they provide products and services our customers want and support local jobs.”
Angus Nardi, Shopping Centre Council of Australia

Scentre Group alone reached new rent agreements with 2,438 retailers, of which 1,624 were SMEs. SMEs contribute approximately 30 per cent of the Group's total rental income.

Allen said, "We acknowledge that this has been a difficult time for our customers and our retail partners. We have supported our retail partners throughout this period on a case-by-case basis. We have done this without receiving financial assistance from Government.

"Importantly, the structure of our leases with our retail partners has not changed and remains based on the mutual agreement to pay a fixed rent."

Meanwhile, Grant Kelley, CEO Vicinity Centres, has drawn ire for suggesting that lease agreements could include base rent plus a variable component based on retailers’ e-commerce sales, justified by bricks-and-mortar stores acting as ‘showroom and fulfilment channel’.

Across the retail spectrum, the ARA’s Zahra reveals that renegotiation results have been moderately successful: “We have heard from retailers that the majority of landlords are sticking strictly to the provisions specified by the National Cabinet’s Code of Conduct, however some landlords are extending better offers than the code requires which is welcome feedback.

“Disappointingly, we have heard that many landlords are doing as little as possible under the law. Many landlords are treating the Code’s minimum provisions for rent relief as their maximum requirement, and are unwilling to offer rent abatement higher than 50 per cent of the total rent relief,” he says.

“However, it is unfair to be entirely critical, as we’ve also received a lot of positive feedback. One medium-sized landlord wrote to all tenants to advise them of a six-month holiday for rental payments to affected tenants.”

TRENDS OVER TIME
CENTRE OF CHANGE: RETAIL EVOLUTION

Since 2015, several major trends have been noted in shopping centres. These have occurred as a result of changing consumer behaviour as well as external pressures on specific categories within the retail sector.

• Foot traffic has been driven by different factors: The number of department stores and discount department stores in shopping centres has been shrinking, but grocery stores – such as Woolworths – and lifestyle businesses, such as gyms, as well as cinemas have been making up
some of that lost foot traffic.

• Shopping centres have become more ‘all hours’: Early opening and late closing has increased in order to appeal to different types of shoppers throughout the day.

• A move toward mixed-use development: Shopping centre landlords have shifted their model to include a combination of retail, residential, and offices. In the future, this mixed-use model could also
include hotels.

• Instability in the discretionary retail sector leading to changing tenancy mix: Retailers, particularly in fashion and footwear, have been vulnerable due to increased competition from large international entrants to the market, as well as online-only fast retailers. This
has led to a ‘shake out’ of such tenants.

The most potent and visible example of the conflict between retailers and landlords has been the public campaign of Premier Investments, Australia’s largest retail tenant and the owner of brands such as Peter Alexander, Just Jeans and Smiggle.

Led by chairman Solomon Lew and CEO Mark McInnes, Premier refused to pay rent during a six-week shutdown in the first wave of the pandemic, and has since advocated for a percentage-of-sales-only model.

Prominent chains, such as jeweller Michael Hill and fashion retailer City Chic, chose to rationalise their store network and close locations due to the intransigence of landlords.

In the jewellery category, Salera said his business was offered the opportunity to renegotiate with landlords, but the terms were “not acceptable”.

In contrast, Sambasivam said The Jewellery Group’s landlords were “by and large more than willing to discuss the opportunities to defer, renegotiate or waive rent”.

On the state level, support has been extended by various governments to assist retailers. The Victorian Government launched the Commercial Tenancy Relief Scheme in March, which included a six-month moratorium on evictions for SME tenants who had applied for rent relief and were participating in the JobKeeper scheme.

Judy O’Connell, Victorian Small Business Commissioner, told Jeweller, “We want to help tenants and landlords negotiate the best possible rental outcomes, so they have one less thing to worry about and can focus on coming out of this pandemic in good shape. We’re confident the new reforms to commercial tenancy laws will give tenants and their landlords the much-needed support and security they need during these incredibly tough times.”

By July, O’Connell’s office – the Victorian Small Business Commission – had received 825 applications to resolve rent disputes; of those that were finalised, 96 per cent resulted in rent relief for the tenant.

Meanwhile, Chapman said the South Australian Small Business Commission had seen a doubling of lease-related work in the three months to June, including almost 80 disputes.

“The vast majority of the [mediations have been] successful with the parties in agreement. We don’t expect a lot to go to court. What we are finding is that a lot of people, once we go to the other party, come to a resolution. They go away and start talking again, and that’s a great outcome,” Chapman said.

He added, “There will be those periods for businesses who were shut down and a lot of them have already come to agreements with their landlords.

“There will be others that haven’t. There will be those that open up and landlords saying, ‘Well, you’re open now, I want all my rent.’ That is not realistic in some cases and there will be a lot subject to negotiation.”

Indeed, the need for negotiation and managed expectations – on the part of both retailers and landlords – is critical
in the post-COVID period.

IMPACT ON SHOPPING CENTRES
PAIN AND GAIN

When it comes to assessing the impact of COVID-19 on shopping centres, Simon Fonteyn, managing director of retail data firm LeaseInfo Group, argues that the figures paint a nuanced picture.

“[The impact is] location-specific, sector-specific, geographically specific – and within shopping centres, certain categories are doing better than others.

"Generally speaking, the smaller shopping centres – what we term Neighbourhood centres – have been the least impacted because customers are tending to spend and shop locally, particularly for groceries. The most impacted have been CBD shopping centres, for obvious reasons: the lack of office workers and no international tourists,” he explains.

“In between those, in general the bigger the shopping centre, the more impact has been felt, usually because of what their mix entails. The exception to that rule would be shopping centres in regional areas, which have not been impacted to the extent of metro areas.” Fonteyn’s analysis is supported by data from KPMG and GapMaps (see chart, above).

In terms of shopping strips or precincts, Fonteyn says the data point to even more of a “mixed bag”.

“Some have been devastated by COVID-19. As an example, I was recently at a strip mall in northwest Sydney which used to be very busy, and the number of vacancies astounded me. Strip malls have been affected because a lot of the businesses that tend to go there are SMEs [small and medium enterprises] and they have been hit really hard.

“There are also high vacancy rates in Oxford Street in Sydney and Chapel Street in Melbourne – the fashion districts – and that gives you an idea that it’s really a mosaic.”

This information should be taken into account when predicting how centres may recover in the medium- and long-term.

Bridging the gap

For retailers, the COVID-19 pandemic dramatically rebalanced the value equation with landlords, most notably by the decrease in footfall, the increase in e-commerce trading, and the rising number of store vacancies.

“Since the early 2000s at least, supply has always exceeded demand for shopping centre space. As a result of COVID-19, with the number of retailers that have gone out of business, you are seeing a situation where demand exceeds supply,” Fonteyn explains.

“Retailers can’t afford now to hold any space that is not making money. Large groups may have one or two stores that they are prepared to take a loss on, but the majority will have to be profitable or breakeven. The pandemic has simply created a seismic shift in supply and demand – and hence, rent.”

Indeed, at the Australian Financial Review’s Virtual Retail Summit, held on 25 June, Ian Bailey, managing director Kmart Group, confirmed that 10–20 year leases and yearly increasing rents would no longer be acceptable to large anchor retailers, which are still responsible for driving a substantial portion of foot traffic to shopping centres.

“None of us are going to be signing anything like that in the future because what this period of time has told us is things can happen where sales decline completely outside of the control of the retailer – and rents do not,” he said.

Jane Cohen, a partner at KPMG Australia and co-author of the white paper, observes that consumer behaviour has been drastically changed by the virus and those trends are likely to continue, placing more pressure on both landlords and retailers to create a more sustainable framework.

“There will be people who jump straight back to the way they were, but even if just a small percentage move, it makes such a difference on these fixed-cost businesses – both the landlords and the retailers,” she says.

It’s a conclusion supported by Fonteyn, who says, “Post-COVID, it’s a whole new world. People are preferring to work from home, at least part of the time, because they don’t have to bother with the commute and it’s convenient for them.

”That means the consumer behaviour will change; they might shop more locally, so there will be less demand in the CBD.” Salera notes, “Landlord’s expectations of achievable rent will need to change. In the short run, the only way that landlords will accept the possibility that they will generate less rent from sites is when they get an increased level of vacancy.

“This may well escalate in the years immediately after the end of the COVID financial support as more businesses are very likely to close their doors due to unsustainable rent levels.”

Zahra adds, “If retailers fall over due to rental costs, landlords may not be able to replace them – it’s better to have a tenant with reduced rent than an empty store. It would make more sense to come to an arrangement that allows that tenant to continue to trade profitably.”

For retailers, the balance of power has tipped slightly in their favour. In addition to further regulatory protections and free state-based mediation services, the Australian Competition and Consumer Commission (ACCC) recently issued a draft determination granting new collective bargaining powers to the ARA and its members.

“The ACCC’s draft determination will help our members exchange information and collectively bargain with landlords to achieve more productive outcomes during this uncertain time,” Zahra says.

“The provision is time-bound, and is scheduled to elapse on 1 September 2021, which will provide retailers with a crucial opportunity to inform themselves and understand what is going on in the marketplace. This will help press the reset button on future lease agreements.”

Meanwhile, Sambasivam predicts that “the valuations and cost structure of operating the stores will come to realistic levels, and landlords’ objective at this point in time is ensuring that more stores are open for trading.”

When it comes to the timing of a negotiation, Fonteyn observes that landlords have been “very accommodating” for his clients and have presented the most favourable terms in 10 years.

“Landlords are desperate for certainty or repeat income, so the next year or two is a great time to negotiate if you are due for a lease renewal,” he says, adding the caveat that with so much uncertainty, particularly the potential for further lockdowns and closures, retailers may instead take a ‘wait-and-see’ approach.

Indeed, he notes that many commercial tenants are “on holdover” – paying rent month-by-month: “They are dealing with all the COVID-19 legislation and paperwork, so most are not even thinking of renewals at the moment, they are just getting through to September.”

In the long-term, Fonteyn predicts rents will adjust in line with the retailer’s sales: “Retailers can’t continue to run businesses that are not profitable. It’s going to be much more about what’s sustainable for that business – and if the business is profitable, then the rent should align more broadly with the average for that sort of category,” he explains.

While jewellery stores have previously been “in the crosshairs of shopping centres” to pay a higher rate per square metre for premium sites, Fonteyn advises that jewellers will be less receptive, as the vulnerabilities of the category have been laid bare.

Speaking at the Virtual Retail Summit, Julia Forrest, a portfolio manager at investment firm Pendal Group, said, “We’re looking at it as an opportunity for rents to be reset to sustainable levels and once they’re at sustainable levels it will give us the confidence to put a high multiple on those earnings as retailers and sales improve.” She rejected a Premier Investments-style model as unacceptable to shareholders.

Salera views the future of retailer-landlord negotiations through a pragmatic lens: “There are certain lease parameters that landlords have considered to be non-negotiable, and I doubt that we will see a situation where small to medium retailers will be able to vary these core terms.

“However, I believe that landlords will be inclined to be more lenient in areas where they have greater latitude to negotiate, rent being one such area.”

Those sentiments were echoed by KPMG’s Cohen, who said: “I don’t necessarily think retailers will be able to get more out of the landlords, but both will be able to create more value if they shift to a more collaborative approach.”

Sambasivam reached a similar conclusion, saying, “I am sure the relationship will be more amicable with more mutual benefits, rather than it being a ‘my way or highway’ approach.”

Meanwhile, Ryan cautions retailers against dismissing landlords’ requirements – yet insists landlords must also manage their obligations to tenants.

“The problem about renegotiating rent is one of fairness to both parties.

“A landlord must get a return on investment or the asset will become starved of capital and operational expenditure – and that includes promotions which attract customers. A retailer needs the lowest rent possible to survive,” he explains.

“It is not landlords’ job to subsidise a retail business, but lease costs should reflect what is being delivered to the retailer. If it is the wrong type of foot traffic or a low level of foot traffic, then the onus falls to the landlord to either improve the outcome or reduce the rent.”

Ultimately, the responsibility falls on both retailers and landlords to negotiate leases that benefit both parties. Without sustainable rents, more retailers will fail – and landlords will lose tenants and therefore income.

However, with realistic and flexible terms in place, retailers can thrive in the new trading environment while landlords can expect stable profits and assets that perform over the long-term. The result is mutually assured success, rather than destruction.

 

USEFUL Resources & LINKS

Business Commissions by State

» Victorian Small Business Commission 13 87 22

» NSW Small Business Commissioner

» South Australian Small Business Commissioner

» Small Business Development Corp. (WA) 13 31 40

» Queensland Small Business Commissioner 1300 312 344

» Business Tasmania 1800 440 026

» Tenancy Unit, Consumer Affairs (NT) 1800 019 319

More Information

» Australian Retailers Association (ARA) 1300 368 041

» National Cabinet Mandatory Code of Conduct Australian Treasury PDF

» KPMG Beyond COVID-19: The Shifting Foundations in Retail Property PDF 

 

NO RESOLUTION OUTCOME
ALTERNATIVE FUTURE: THE RETAIL LANDSCAPE

If current trends continue unabated, without a flexible and reasonable response from landlords, the retail landscape in Australia could look dramatically different in the coming years. Overall, retail footfall has been in decline since at least 2017 and at an accelerating rate – which will likely continue as e-commerce penetration increases.

Yet over the same period, rents have increased, on average, by 4–5 per cent per year, according to LeaseInfo Group managing director Simon Fonteyn.

Tellingly, the vacancy rate across Australian shopping centres reached its highest rate in more than 20 years – 5.1 per cent – in June 2020, according to data from commercial real estate firm JLL Australia. For CBD-based shopping centres, the vacancy rate is at more than 10 per cent.

Shopping precincts and strips have fared even worse; an analysis by real estate advisory firm Plan1 Project Management found that Melbourne’s Chapel Street had a vacancy rate exceeding 20 per cent in June 2020. Across the city’s 11 major retail strips, the vacancy rate was 12.3 per cent, an increase of more than 4 per cent when compared with 2018.

Speaking at the Australian Financial Review’s Virtual Retail Summit earlier this year, Julia Forrest, a portfolio manager at investment firm Pendal Group, speculated that vacancy rates would likely increase further, and that more retailers would opt for holdovers – month-to-month contracts – rather than long-term leases.

Peter Ryan, director of retail consultancy RED Communication, says “The economic reality is that we face an extended period of poor market conditions with some economists suggesting the impacts could last a decade or more and that we have not seen the worst of it yet.”

“The economic reality is that we face an extended period of poor market conditions with some economists suggesting the impacts could last a decade or more and that we have not seen the worst of it yet.” Peter Ryan, RED Communication

However, Ryan believes “online is only part of the solution” and that stores will “regain their position as the centre of the customer relationship – [but] when that happens though is the critical question.” Without a sustainable reduction in rent, Ryan says retailers will face increasing pressure to exit tenancies.

Meanwhile, Fonteyn argues that shopping centres will not disappear from the Australian landscape – but that they will be “forced to change”: “Their model is getting shoppers in, getting them to spend, and getting them to stay as long as possible.

“After COVID-19, that has to be re-adjusted. There will be another iteration of different types of use within shopping centres.” He adds that shopping centre owners are constrained by strict planning laws. “It’s not that easy to introduce new shopping centres.

“There have been a couple of new centres built [in the past 10 years], but the majority have been there for decades and have simply expanded their trading area. However, the shift toward mixed-use, including residential, offices, services, and lifestyle, may be hampered as consumers increasingly opt to avoid crowded spaces due to safety concerns.

Additionally, the KPMG white paper Beyond COVID-19: The Shifting Foundation of Retail Property notes that ‘destination shopping’ at large-scale centres is in decline, with consumers increasingly preferring to spend locally in what is referred to as ‘village shopping’.

At the same time, replacing tenants has become “increasingly difficult”, with landlords “having to work much harder to attract new tenants and repurpose their centres to make them relevant to their communities.”

In order to justify rental costs, the report’s authors suggest that landlords provide “supporting infrastructure” for retailers who are moving toward omni-channel sales, such as “kerb-side pick-up zones, dark stores/floors, shared click and collect counters, or parcel lockers”.

If these changes do not occur, the value of shopping centre assets will continue to decline – as will the Australian retail sector.

 

RENT READY
NEGOTIATION CHECKLIST FOR RETAILERS

 

Assessment
Examine your business model and decide whether it is viable for the long-term: what is the existing occupancy cost, and what is a sustainable rent going forward? How expensive is the store fit-out and how long will it take to amortise the cost?
Analyse market trends and uncertainty to determine whether a short, flexible lease is preferable to a longer term
Analyse the performance of your store and the shopping centre or precinct: is it in the best possible location in terms of the centre’s retail mix, and delivery of quality foot traffic? Would it be better suited to another area, or even moving to a shopping strip?
Given the changes in consumer behaviour, how is the shopping centre management planning to support retailers and drive foot traffic over the next two to five years?
Education
Seek advice from your buying group or industry organisation, such as the Australian Retailers Association: inform yourself about the landlord’s obligations, what you are entitled to as a tenant under legislation, and what you are not required to provide – such as cash flow projections or financial statements
Refer to the relevant retail tenancy legislation in your state – several have been updated in recent years with increased protections and flexibility for tenants
Check your relevant Small Business Commissioner’s website for guidelines and frequently asked questions regarding commercial tenancies
Negotiation
Bring an attitude of fairness and good faith to the conversation, but recognise that the survival of your business is paramount
Be honest with the landlord about what you can afford
The Australian Retailers Association recommends retailers avoid signing a non-disclosure agreement, as this limits their options for collective bargaining
If you are unable to come to an agreement, seek support from your state or territory’s relevant Small Business Commissioner, as many are equipped to provide mediation services at low or no cost


Download Checklist PDF »

 

READ FEATURE IN ISSUE

Hover over eMag and click cloud to download eMag PDF

FRONT COVER: The Thomas Sabo Magic Garden collection continues to inspire and delight, with delicate pieces evoking the beauty of nature.
 

PREVIOUS ISSUES











ABOUT THE AUTHOR
Arabella Roden • Assistant Editor

Arabella Roden is assistant editor of Jeweller. She has nine years media experience in Australia and the UK as journalist and sub-editor








(c) 2020 Befindan Media