Long-term rent deals have become a noose around some retailers’ necks as the economy has worsened. But with 50% of high street and shopping centre leases expiring by 2015, landlords may have to offer more breathing space.
We’re paying 50% increases in rents in a recession and it’s diabolical,” says Simon Burstein, chief executive of six-store London designer indie Browns.
“The question we have to ask is whether we can make our shops pay for themselves, given the system. What do we do? When the lease expires do we not renew and shrink our footprint? Clearly there needs to be more support from landlords,” he says.
Because it operates in sought-after central London locations, Browns has felt the impact of rocketing rents. In March, Browns’ Labels For Less store had to move from its home of 10 years on South Molton Street to a more affordable location in Marylebone Lane, and is being driven out of its Sloane Street property after luxury Brazilian jeweller H Stern reportedly paid a £1m premium to secure the space.
“It’s the base of the system that has to be re-looked at. In overseas markets, there are laws to preserve the individuality of towns and streets. Unless there is legislation brought in here we will certainly see the disappearance of any individuality in a lot of areas,” says Burstein.
Despite operating in London’s West End, where rents are historically higher, Burstein’s views mirror those of indies and multiples up and down the country which are struggling to pay rents that are out of kilter with high streets blighted by decreased footfall, reduced consumer spend and empty shops. This year, poor trading conditions have resulted in the high-profile administrations of Peacocks, La Senza and Aquascutum, and retailers are now calling on landlords to put a stop to sky-high rents and introduce more flexible terms in order to remain viable locations.
This comes at a time when retail occupancy requirements are changing in the face of increasing online sales and property directors are reviewing their store portfolios. Former Aurora Fashions president Stewart Binnie said in March that the group, which owns the Oasis, Coast and Warehouse womenswear chains, could close half of its stores as its customers increasingly take their spending online, with 70% of its sales now involving some form of interaction online.
The problem facing many retailers is that they are locked into lengthy lease agreements, with some as long as 25 years, which include upward-only rent review clauses after five years. As identified in the Portas Review, this has insulated landlords from the economic downturn and those rents no longer reflect true value in a recessionary market.
“Rent reviews have a false economy in that if the rent has not increased in that market, then the rent stays the same, but the rent may have stayed the same for 10 or 15 years.
That’s because it would have been set too high from the very beginning,” says Tony Devlin, senior director and head of high street retail at property consultancy CB Richard Ellis.
In contrast, new market entrants – those taking up new leases, renewing old ones or businesses emerging from administration – can take advantage of the fact that rents have fallen by about 40% since peak levels, meaning it’s not always a level playing field.
Monthly rent payments are becoming the norm for new leases, but those on existing agreements are still being hit by the traditional system of quarterly rent payments, whereby rents need to be paid three months in advance, reducing cash flow at a time when conditions are already strained.
As a result, New Look and Monsoon and sportswear retailer Shop Direct are seeking monthly rents.
The past 12 months have seen New Look bring the shutters down on about 10 of its stores, following its decision last year to draft in CB Richard Ellis to review the future of its store portfolio. With approximately 100 leases having come up for renewal or near to expiry, decisions to close any more of its 600 stores will depend on the willingness of landlords to negotiate better terms. “Where we have opportunities to review our sites we will do so. And the landlord’s ability and desire to review our occupancy of that building will dictate whether we stay in a lot of cases,” says Richard White, group property director at the fast-fashion chain.
At present, New Look is working its way through its list of about 350 landlords, and Devlin says negotiations are ongoing: “Some have agreed, but by no means all. There is a long way to go in those discussions.”
With research from commercial property agent Jones Lang LaSalle suggesting 50% of high street and shopping centre leases, and 17% of those at retail parks, are set to expire
by 2015, the retail landscape looks set for considerable change and landlords in secondary locations could see their tenants exiting, leaving them to face empty property rates, unless they are willing to renegotiate at rent review or lease renewal.
“If it’s a non-core store within their portfolio, then retailers are looking to leverage their position and negotiate more flexible terms or rent reductions, and often they will not progress unless they get those,” says Guy Grainger, UK head of retail at Jones Lang LaSalle.
However, for smaller landlords the prospect of having to reduce rents may obviously be a bitter pill to swallow. “We have a lot of smaller landlords and they can sometimes be the most difficult to deal with, because if they have just one property, or a small number, any concessions could make things difficult for them,” says White.
David Abramson, managing director of rent restructuring firm Rent Reform, says the biggest issue is educating landlords about the need to communicate with their tenants; instead, many are resorting to using “aggressive bully-boy managing agents” because they are worried about their own position with their bank and lenders.
Mike Butterworth, chief operating officer at Capital Shopping Centres, which owns 14 developments including Lakeside in Essex and The Trafford Centre in Manchester, agrees there needs to be an open dialogue with tenants. “If a retailer comes to us with a genuine short-term cash-flow problem, we’ll work with that retailer on a case-by-case basis,” he says.
however, rents are only part of the picture. Service charges and business rates pose a major barrier to retail occupancy. “Total property costs over the past 15 years have gone up substantially. Not just in terms of rent, but in terms of rates and service charges. The property and the retail industry need to come together to work through these issues,” says Jeremy Collins, property director at department store chain John Lewis.
White says that, through his role as a committee member and treasurer of trade body the Property Managers Association, he hopes to encourage an “honest, open dialogue between all interested parties” to find ways of getting total occupancy costs down. “If we are going to maintain a significant high street retail presence for a lot of companies, we need to consider all of the occupancy elements in the round and not just focus on one or two areas,” he says.
Nevertheless, rents will remain high in central London, key shopping centres and large regional towns. However, secondary locations will see further rent erosion, meaning retailers will be in a stronger position to negotiate more competitive property deals.