Shopping centre letting terms are destroyed in 2013 - report
THE Irish shopping centre lettings market has been turned completely on its head through the last twelve months as traditional strategies and rules are ditched by landlords and tenants in reaction to a new wave of strategic examinerships.
According to the first Jones Lang LaSalle Irish Shopping Centre Snapshot 2013, which looks at the status of ten of Ireland's leading shopping centres, asset managers are no longer seeking to fill their centres based on the age old tenet of letting to the highest bidder with a view to increasing rent again with future five yearly reviews.
Instead they are increasingly turning to "concession" type short term terms – often directly linked to turnover. They are also starting to turn more fluid terms to their advantage as the market shows signs of recovery.
Stephen Murray, retail director of Jones Lang LaSalle adds: "What landlords previously believed to have been strong multiple retailers have been completely undermined as secure and reliable tenants through 2013.
"In many cases wholly owned Irish subsidiaries of international retailers have been through the examinership process as the Irish equivalent of a UK pre-pack administration. They have renegotiated rents or repudiated leases entirely at many under performing stores. These actions mean that the perceived value of many long-term leases have been devalued almost overnight.
"In reaction to this, any new deal that the landlord undertakes today usually recognises that even though the brand name may be international, the security of income is not what it used to be."
As a result, Mr Murray says shopping centre asset managers have started behaving like "the heads of department stores," with many new tenants increasingly treated as "concessionaries" on much shorter terms.
"Like the department store director, this improvised new role involves managing a complex blend of exciting new brands and actively looking for attractive "points of difference" which might enhance the retail balance in the shopping centre. This is proving to be a double edged sword for both parties.
"While the tenants know that they can benefit from more attractive terms in the short term, they are also beginning to realise that they could end up out the door down the road, if the landlord happens find a more attractive and "edgier" trader."
Typically the landlord now gives a short-term agreement of three to five years with the rent often directly linked to turnover.
"The principle of turnover rents became more prevalent even in the boom period when imported by the desirable new retailers on the block such as Inditex.
"When Zara entered the market here the retailer almost invariably signed turnover only related leases with no minimum base rent."
Frequently the landlord is focussed not only on the rental return they can get out of the unit but also the attraction that the new tenant's brand will offer as a point of difference for the customers visiting the shopping centre. Indirectly they can gain through the increased spend that more footfall generates for their other tenants, many of whom are still on historically high rents," says Mr Murray.
He added that "pop up" shops, initially employed with reluctance by landlords, are now being viewed as a useful tool to trial new retailers and to keep the retail mix freshand are therefore likely to remain a permanent fixture going forward – albeit at a lower percentage of occupancy as shown today.
"Landlords 'taking the pain' of softer concessionary deals with low base rents are often looking to limit the length of lease and right of renewal and look for tenants to give up their landlord and tenant rights by signing deeds of renunciation. The landlords will now often insist the terms are personal and un-assignable to other retailers."
"With some pick-up and interest in the market, the retail sector is starting to become much more stratified. The strongest retail locations have already seen a stabilisation of their rents and a progressive reduction in the vacancy ratios." Mr Murray also warned of increasing difficulties for secondary and tertiary centres in unsuitable catchments as established leading centres strengthen their attractiveness going forward."