Retail rents just aren't stacking up

This article originally appeared on the National Retail Association.

By the time your lease ends, your rent will have increased annually at a higher rate than your sales growth causing a profit erosion to your business over the term of the lease – in many cases to the point where the business is no longer viable.

Every lease has an annual rent increases built in. The idea is to ensure that increases in costs for the landlord to own the property they’re leasing to the tenant are covered by the increase in rent, and that’s fair enough.

In the past, most leases had an increase each year in line with the cpi. Other leases simply applied a flat rate increase of 3 per cent which would usually cover the cpi and add a little extra ‘uplift’ to the landlord. 3 per cent went to 4 per cent and then 5 per cent annual increases became normal – even when cpi was only increasing by 1.5 to 3 per cent.

Last week, one of the major landlords released their September quarter results lauding comparable centre ‘moving annual turnover’ (MAT), year on year to the end of September increasing by 1.6 per cent and that specialty stores had driven that performance with comparable specialty sales up 1.8 per cent against 1.3 in the June quarter.

Deloitte Access Economics partner David Rumbens however, believes sales growth in Australia over the past couple of years has not been achieved through good economics but rather “Australia’s retail sector has been sustaining a reasonable rate of sales growth in an unconventional way — not so much from income growth, but leveraging off consumers’ willingness to spend.”

He went on to say “many retailers have only survived the last few years because we’ve lived beyond our means. But that ship has now sailed.”

With sales growth looking shaky and annual rent increases taking more and more out of retailers’ bottom line, it is crucial that retailers take every opportunity to realign rents with performance and a lease renewal is one of the key opportunities for a retailer to do that.

Obtaining, understanding and utilising market data is a crucial component in negotiating the best commercial terms for any lease. Whilst lease data is difficult to access in some States, in NSW, Qld and ACT, leases must be registered with the Land Titles Registry and that data can then be accessed and analysed. Similarly, The Property Council of Australia compiles data provided by Shopping Centre owners which provides sales and foot traffic data across various retail shopping centre classifications.

Shopping Centre Performance – is it proportional to rent increases?

Managing Director at Spectrum Analysis, Peter Buckingham, is quoted as asking “How do shopping centre owners press for increases in rents of 4 or 5 per cent per annum when an increase in the $ / sqm sold through the Centres has been increasing in the 0.5 – 1.65 per cent per annum over the last few years?”

When we explore individual shopping centre data over the past 2 years, one worrying trend is seeing Centre’s who’ve undergone re-developments and added GLAR (lettable shop space), the increase in Turnover for the centre and foot traffic has resulted in a decrease in the key retail measure of Turnover divided by lettable area or to compare to retail benchmarks, Sales per square meter!

An example of this is the highly regarded Chadstone Shopping Centre who added around 80,000sqm of lettable area over the 2 year period increasing the Centre’s turnover (MAT), by around $500mil and foot traffic by around 4.8million per year which both sound good, but for the retailers, this just means the pie hasn’t increased by the same size as the people sharing it (thus far), and sales per square meter has dropped by a staggering 17.7 per cent to just over $9000/sqm – only marginally higher than any other Super Regional Shopping Centre including highly regarded Doncaster where kiosks and shops can be leased for around half the rent per square meter.

Lease Renewal – You get what you negotiate

Renewals data over the past two years shows only a minimal change across the three States who register data with the average increase in base rent upon renewal of a lease dropping from 3 per cent in February 2019 to 2.95 per cent over the past six months but the picture becomes much clearer as you drill down into individual States and Shopping Centres.

NSW renewal rents continue to record increases in base rents with the percentage average growing to around 6.5 per cent while Queensland has experienced a decline recently with an average renewal percentage change of -3.5% driven by a few major centres agreeing to renewals well below the passing rent at the time of lease expiry.

In Qld, renewal rates have decreased over key sectors including Fashion & Footwear (-12.8%), Restaurant & Food (-8.2%), Jewellery (-7.9%), and Kiosk rents (-3.83%), while in NSW, only Jewellery experienced a decline in renewal rents while the other 3 categories each saw rents continue to increase by 4.5 to 5.5 per cent on renewal.

In today’s challenging retail environment, it is absolutely critical that retailers seize on every opportunity to realign rent and reduce risks to the business, so it remains viable and profitable for the full term of the next lease.

Renewing a lease provides that opportunity but is also a huge risk with significant consequences including ongoing financial distress or even closure if not handled correctly.

As the tenancy and leasing partner to the National Retail Association, Lpc Cresa is currently offering an additional discount on their already special NRA member rates. Contact Lpc Cresa before 30 November to discuss your next lease renewal and you’ll receive a 20% discount on standard service fees for their expert advice and representation.