Dom Moore
In recent weeks, there has been a great deal of debate about turnover rents, leading us to believe that they are the panacea to the structural challenges being faced by the retail sector.
At Newsteer, we are working with retailers, landlords, developers and Local Authorities helping to re-shape the retail sector by understanding the dynamics that are driving change. We believe that turnover rents have an important role to play, but we must be careful in our rush in trying to find an instant fix to what is a fundamental structural market problem.
We must not be tempted to replace an out moded model of inflexible and restrictive upward only rent reviews, with something that does not deal with the real market challenges being faced by today’s retailers. We must work together to create a positive understanding between landlord and tenant that changes behaviour and aligns interest, not only of the parties but of wider stakeholders. Building a sustainable relationship based on mutual success must be our collective aim. A healthy retail sector plays a vital role in growing and sustaining our local communities as well as creating jobs and helping to drive our economy.
We are currently involved in many rent negotiations, and it is a shame that some landlords see this as a short-term fix to protect income – and for some tenants a means of reducing short term costs.
Both parties miss the longer-term benefits by thinking this way. The landlord has a self-interest in investing in a supportive and commercial environment within which the retailer can bring its brand and entrepreneurship skills.
For too long, landlords have hidden behind long-term fixed contracts where the return has relatively little to do with the underlying success of the tenant. This has fast become a focus on the contract rather than a focus on the retail story.
Over the past few years, we have seen some valuers increasing asset values annually, resulting in a greater and greater gap appearing between book value and real value. If the tenant was not trading well then that had nothing to do with the market rent – as there was always demand to take the space. A generation of valuers have grown up with little understanding for retailers and the challenges they face today with their businesses.
The move to turnover rents changes behaviour and thinking but it needs to respect and reflect the many different retail business models and the returns that are made. Not all retailers are the same and each delivers different cash flows and returns. But let’s not forget that a lower return does not necessarily mean a poorly run business.
Negotiated fairly, turnover rents can support positive change and provide a healthy sustainable future for all parties. Landlords need to accept that the returns they will get from different retailers will vary and they must invest along with the retailer in enhancing performance. The age of the constant rental uplift is dead, and landlords can no longer sign a lease and just walk away until the lease comes to an end. Today, we have a great opportunity to re-engineer retail, but this will be missed unless we are prepared to change with it.
For further information contact
Dom Moore
T: 020 3151 4850
M: 07769650190
E: dom.moore@newsteer.co.uk
W: www.newsteer.co.uk
20 Farringdon Street, London, EC4A 4AB