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23 January 2018
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Retail leases - defusing a time bomb?

Incentive event

Many long leases signed by retailers in the 80s and 90s will come to an end over the next two years. Could changing retail habits lead to a dramatic increase in vacancy rates? A roundtable organised by Incentive FM met to discuss the issue.


6 May 2014

Figures from real estate analyst IPD suggesting that retailer vacancy rates could be pushed above 50 per cent by 2017 were the catalyst for this event, where its potential impact was examined by an expert panel. 


The main conclusion of the debate was that while there would indeed be a huge readjustment in the retail landscape, the suggested Armageddon was unlikely.

However, landlords would have to alter their expectations of rent levels and lease lengths – something that has happened in some shopping centres. The panel agreed that five-year leases are likely to become the norm. “The result won’t be 50 per cent vacant retail units, but could easily be 50 per cent rent reduction,” said Mark Williams.

But if the landlord has to deliver the same product for less money, how could managing agents make life easier? Participants agreed that retailers no longer differentiate between rent and service charge; for them, it’s just a cost that has to be paid.

But many landlords have squeezed service charges over the past few years to keep costs down. This short-termism had delayed the need for essential works in many cases and, as a result, the panel thought service charges would be likely to rise.

Managing agents did not often have a strategy regarding the service charge element and what most retailers needed was a reassurance that there would be no unexpected demands. This would require better forecasting and benchmarking. “What you get for your money from your service provider massively varies and the key is to empower the retail centre manager to manage this,” said Robinson.

Incentive’s Martin Reed identified one opportunity. “Greater efficiency could be achieved and the overall cost of occupancy reduced through a more joined-up use of resources… tenants in a shopping centre could make better use of the cleaning and maintenance services that already exist, that they contribute to through service charge, by using them on tenant demise.”


Excess space
The panel estimated that there is about 30 per cent excess retail space in the UK, but there was debate as to how serious things really are; some participants were more optimistic than others.

Richard Phillips said: “We’re seeing a slight improvement with some competition for units in shopping centres that are doing well” – a degree of optimism shared by CBRE’s John Prestwich. “If we compare 2012 with 2013 there are some positive signs. The amount of floor space let by us is up 7.1 per cent for retail, 2.37 per cent for catering and 2.47 per cent for leisure.”

But the way landlords coped with struggling retailers remained a key area for potential innovation, with landlords cautious about agreeing to reduce rents. The amount of vacant property within secondary shopping centres meant that good retail chains had the power in many rent/lease negotiations.

Potential new measures for the management shopping centres included a model whereby two different centres shared management, as has been seen of late in some cases. The landlord response to the logic of this model was muted, but Jeremy Waud said he would “rather see a well-paid, effective and motivated manager spending 50 per ent of his time constructively looking after a centre as opposed to a less effective, less well-paid individual allocating 100 per cent of his time to the issues of the centre”.


Town centre revival
The panel broadly agreed that councils had to be more active in driving opportunities for fresh uses and investment into high streets. The balance of shops may also need to change to recognise the greater demand for food and leisure. Better planning, development and parking regimes can reinvigorate the high street and allow the trader in this environment to compete with out-of-town offers.


Conclusions

The panel thought that the shopping centre visit should be a pleasurable experience and customer service should not be sacrificed at the expense of trying to operate at a lower cost base. Money is needed to invest in both building fabric and repairs, as well as a good quality of environment and service if customers are to get what they are after. In conclusion, retail rents may adjust down, perhaps by up to 50 per cent. Once the burn-off has been completed the result will be a more a positive outlook. 


Panel participants:

  • Jeremy Waud, managing director, Incentive FM Group
  • John Prestwich, head of UK Shopping Centre Management, CBRE
  • Richard Phillips, managing director, Ashdown Phillips
  • Mark Williams, director, acquisitions, finance and investor relations, Hark Group
  • Martin Reed, managing director, Incentive FM
  • Mark Robinson, investment director, Ellandi LLP