Tuesday 30 May 2017

Retailers blast 'greedy' landlords as rent rises push firms closer to edge

Bulk of businesses saddled with contracts struck during the boom that tied them to long leases and upward-only rate reviews

A shopper passes a sign on a
building on the fashionable
retail area of Grafton Street
A shopper passes a sign on a building on the fashionable retail area of Grafton Street

John Mulligan and Peter Flanagan

'Pure greed." That is how managing director of Butlers Chocolates Colm Sorensen feels about efforts by landlords to lump rent increases on retailers at a time when the sector is facing some of the toughest challenges ever as consumers cut spending on the back of higher taxes, unemployment and job insecurity.

Mr Sorensen's company has a number of high street retail coffee outlets as well as its manufacturing arm, but he says that the cafe side of the business is now just marginally profitable after turnover dropped by a double-digit figure since 2007.

While legislation introduced last year outlawed the upward-only rent-review clauses in new leases, the bulk of retailers are stuck with contracts struck during the boom or earlier that mirror economic conditions four years ago rather than the current besieged state of the country's high streets.

Celtic Bookmakers founder Ivan Yates lamented last week, as his business empire collapsed, that while he had been able to renegotiate leases for some of his shops, other landlords had demanded significant amounts of "surrender" money for other leases the bookmakers had quit.

That contributed to scuppering any restructuring plan that could potentially have resulted in a massively slimmed down, but still existing business.

Some 1,525 businesses were declared insolvent last year -- 177 of them in the retail sector -- and high rents were blamed in a huge number of cases.

When a giant poster saying "high rents are killing jobs" was hung from a building on Grafton Street in Dublin last year, few people argued with the statement.

Mr Sorensen points out that at Dundrum Shopping Centre in south Dublin, where Butlers was one of the first tenants when the complex opened in 2005, the owner of the complex -- Joe O'Reilly's Chartered Land -- is pushing for massive rent hikes.

"I don't necessarily have a problem with a rent review after five years, but they're looking to raise it by 100pc," explains Mr Sorensen, who adds that negotiations are ongoing with the landlord, which is already involved in arbitration with a number of other tenants.

He adds that all the leases Butlers holds on its cafes in Ireland -- 13 of them in Dublin, including one at Dublin Airport -- are being renegotiated.

Mr Sorensen and other retailers point out that the problem Celtic Bookmakers had with being pursued for surrender money is one that also prevents many other traders from being able to exit unprofitable locations, with most tied into 25-year leases that have upward-only rent reviews.

Many retailers have also given personal guarantees that could include their homes, leaving them in a precarious position if they can't pay higher rents imposed by landlords.

But the issue isn't necessarily as straightforward as retailers might suggest. In the major retail centres around Dublin and other cities around the country, landlords aren't the stereotypical greedy, sleazy money-grabbers we may imagine.

Many of the buildings are controlled by major pension funds. To a certain extent the rents pay the pensions of many retired people all over the country.

Duty

The landlords have a legal duty to do the best for their investors, and they also fear reducing rents because doing so diminishes the underlying value of the asset.

That also has knock-on effects for properties that are ultimately controlled by the National Asset Management Agency.

Conversely, if landlords don't agree to reduce rents, they could be left with a vacant lot and no income for a number of months until a new tenant is found. That new tenant is certain to be paying substantially less than the previous tenant would have been.

Even a reduced rent to an existing tenant would be higher than what a new tenant would be forking out.

Australian electrical and homeware retailer Harvey Norman, which has had a torrid time in Ireland, has had first-hand experience of the implications of being shackled to onerous leases inked during the boom.

Its chairman, Gerry Harvey, recently said in an interview that in Ireland, leases were his "biggest gripe".

However, he claimed that even though the chain was losing a substantial amount of money in Ireland, it made more financial sense for the group to retain its presence and hope it can at least break even, rather than fork out up to €300m to shut its operation here.

David Fitzsimons, the chief executive of industry body Retail Excellence Ireland, maintains that any gains made by retailers over the past two years in terms of negotiating lower rents with landlords have not been repeated since.

"We're really just waiting for a new government so we can try to progress new legislation," he said.

A commitment has already been given by Labour, he explains, to ban upward-only rent reviews on existing leases -- something Justice Minister Dermot Ahern has refused to do, citing "legal and constitutional" reasons.

Fine Gael has also pledged that it will actively address the issue following the General Election.

Mr Ahern maintains that landlords have moved on rents as a result on the upward-only ban on new leases, claiming they realise that "half a loaf is better than none".

But many retailers rubbish Mr Ahern's assertion that there has been any real flexibility displayed by most landlords.

"Landlords are still living in a dream world," according to Stephen Mackerel, chief executive of the Irish arm of Carphone Warehouse.

He reckons that up to 12pc, or about 40,000 of the people still involved in the retail trade, could lose their jobs this year due to challenging conditions and the inability of retailers to have one of their biggest costs -- their rents -- lowered.

"There's a two-tier market out there at the moment," he claims, explaining that retailers who manage to secure new, cheaper leases are subsequently in a position to significantly undercut prices for similar goods offered by rivals, often on the same street.

One retailer, who didn't want to be named, says that he estimates he is paying €1m a year over the odds in rent for his handful of premises because of upward-only rent reviews. He, along with some other retailers, is concerned about venting his anger publicly for fear of retribution from landlords.

There have also been allegations that landlords have been artificially inflating rents at some units so they can argue for higher rents from other tenants, especially when such demands head for arbitration.

In November, Fine Gael TD Alan Shatter suggested to the Dail that some landlords had been giving "secret incentives" to some tenants to agree to rent increases so that higher rents could subsequently be squeezed from other clients.

He asked for the practice to be criminalised, but Mr Ahern said to do so would be "detrimental to the property market".

Traditionally, pension funds have used three avenues for investment: stocks, property and bonds. Dividends are either down or gone, while property prices and bond yields (in this case) have fallen off a cliff as well.

Property was especially valuable because the rents paid were either constant or always going up. Now that is not the case and investment managers are in a tight spot.

Frank O'Dwyer, who as chief executive of the Irish Association of Investment Managers represents some of the major pension firms, claims that when retailers provide enough detail, in most cases landlords will reduce the rent.

Tenants

"Last year, our members reduced rent in around 75pc of cases when tenants provided accounts to prove they were cutting costs across the board and rent was part of that process," he maintains, accusing some retailers of failing to sufficiently tackle the rest of their cost base even as they seek rent reductions.

"Some businesses are simply no longer sustainable," he adds. "In 2005 or 2006, it may have been possible to charge €100 for someone getting their hair done every two weeks. That's not the case now."

David Fitzsimons maintains that the prognosis remains potentially dire for retailers.

"The fact remains that out of the main shopping centres in Dublin, only one has reduced rents and even that was not by a significant margin," he says.

"Our members are under huge pressure as it is and with rents possibly increasing they are being pushed further to the edge."

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