Landlords coping with the loss of anchor tenants

Yesterday we looked at the collapse of REDGroup and the departure of Borders stores from shopping centres, and what it means for landlords. Today, in the second part of our two-part series on the impact the collapse of major chains has on retail landlords and shopping centres, we ask how much due diligence REDGroup's landlords would have done and what the state of the industry looks like. 

Property Observer asked several retail specialists about the impact from the mass store closures, the lessons for landlords and tenants, how landlords vet tenants and about the true state of retail property.

 Are the landlords usually owed money when tenants suddenly depart?

“Absolutely,” says retail specialist Simon Rumbold, national director of property economics with property forecaster and researcher Urbis. “When a tenant simply just walks away, cash flow stops immediately.

“In all likelihood, there are rental arrears with possible legal arguments over who is owed what.”

Additionally, it usually takes a few months before new tenants occupy the spaces, which can cost landlords money in lost rent. 

Is the entry of such international retail giants as Gap and Zara into Australia fortuitous for landlords, given Borders’ demise?

Unquestionably. “We are aware of two or three other international groups occupying large-format stores that are looking at coming into the Australian market right now,” Rumbold says.

“At least one, possibly two, of those international groups is looking at taking ex-Border spaces right now.” 

How highly do landlords value big brand names when vetting prospective tenants?

Rumbold says the strength of the trading brand is the landlord’s number-one concern. Landlords asked themselves such questions as: Is this brand going to succeed in our shopping centre? What is the track record of this brand in other shopping centres?

“Ultimately, they want the rent from the shops, but they also want the brand to add to the appeal of the whole shopping centre,” he says. “They want the money and the brand.

“Less-known retailers are basically working off the shopping centres, whereas the big brands can contribute to the strength of the shopping centre.”

How deeply do landlords check a prospective tenant’s finances?

“The financial security of the lease and the lessee is obviously of primary concern for a landlord,” Rumbold emphasises. Landlords want to closely review a would-be tenant’s financial statements.

And the monitoring a tenants’ finances continues after the signing of the leases. “In the shopping centres [as opposed to strip shopping areas], landlords are on your back the whole time,” says Duncan Johnston, executive chairman of Collins Booksellers. Johnston and his associates also manage 15 to 20 retail and commercial properties for self-managed super funds, including his family’s fund.

What financial sureties are sought from tenants?

Rumbold says a landlord would want a guarantee that a tenant will pay the rent, and typically a bond is required.

“That means that if something happens and if the tenant vacates or doesn’t pay rent, they can draw upon the guarantee or the bond,” he explains.

However, it seems that shopping centres might not be as demanding with some heavyweight tenants regarding rental guarantees.

“With such companies as Colorado, Borders or whatever, I can’t tell you what sort of guarantees would have been in place with individual leases,” Rumbold says. “They would have varied from landlord to landlord. But there would have been some guarantees in place.”

But he stresses that if a business fails financially, a guarantee “may count for nothing”, depending upon the type of guarantee.

Do shopping centres require tenants to provide personal guarantees for rent?

Personal guarantees would not, according to Rumbold, be sought from the big retail chains “But mum-and-dad retailers would have to provide personal guarantees.”

Is the level of retail vacancies in good or bad shape?

“It is still in very good shape,” Rumbold says. The latest Urbis annual national survey of shopping centres, conducted last year, reported a vacancy rate of 2.9 % in large regional shopping centres, and 3.9% in second-tier centres.

Despite the impact from the jump in household savings and the slowdown in consumer spending, shops are not lying vacant for long between tenants.

“The vacancy [level] has increased very marginally since the previous year,” says Rumbold, “but is still at a very low. It is not at a level of concern and it is well below international benchmarks. Australian shopping centres have always performed exceptionally well in terms of vacancy rate.”

Rumbold comments that that a 3% vacancy rate for retail property is sustainable, but a 2% vacancy rate is preferable – giving sufficient flexibility for a changeover between tenants.

He stresses that any vacancies in many shopping centres such as those in Chatswood and North Bondi, in NSW, “often fill at the drop of a hat”.

“Although retail conditions overall have been fair to soft, they haven’t been negative. Landlords have been reporting reasonably stable or improving sales.”