Six tips for retail landlords in tough climate
As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.
Recently we noted a trend that the current tough retail environment sometimes gives tenants the upper hand when it comes to rent negotiation. The Australian Bureau of Statistics has released data that show retail growth is the slowest it has been in 50 years, and no one disputes that retail strips have been hit hard.
However, there are things retail landlords can do to put themselves in a better position. Property Observer asked retail property specialists for their tips on how smart landlords can try to protect their positions in the face of falling retail sales:
1. Understand your tenant’s business: “You need to understand the success drivers of a retail business are and understand what that means for you as a landlord,” says Simon Rumbold, national director of property economics with property forecaster and researcher Urbis.
In turn, this puts the landlord in a stronger position to help attract shoppers to a particular tenant.
2. Treat your tenants as your customers: “I always quote Frank Lowy, who says his customers are his retailers,” Rumbold says.
“And Westfield is a customer-focused business and so is entirely focused on the relationship with its tenants – as opposed to its relationship with their customers walking through the front door and spending money in the shops,” he explains.
Rumbold says shopping centre landlords should be thinking about the marketing of the centre for the tenants’ benefit and “optimising the tenant mix so overall everyone succeeds – drawing from their common strengths”.
3. Help struggling tenants: In this way, retail landlords step in and help an ailing tenant before it fails.
“Good shopping centre managers will walk the floor everyday of the shopping centre,” Rumbold says. “If they see a shop where stock is getting run down or not well-presented, or a shop that doesn’t seem to be operating every well, they will have a chat to the retailer, making suggestions for improvements.”
“They are obviously not able to pry into the personal financial position of a shop or retailer – that’s not their business – but they are there, ultimately, to make sure retailers succeed as far as possible,” he explains.
Duncan Johnston, executive chairman of Collins Booksellers, also manages 15 to 20 retail and commercial properties for self-managed super funds. And in his role as a landlord, Johnston keeps a close watch for retail tenants that may be experiencing difficulties.
“If our tenants are suffering, we look at ways to assist them,” he says. In one recent example,
With another tenant, Johnston says his SMSF investors have agreed to cut the rent by 20% until November. “This will ensure they have a good lead-in to Christmas,” he says. If rent relief is being given,
4. Ensure tenants have a viable business and a good track record: This is a time for picking tenants with even more caution than usual because of depressed retail sales and because the viability of retail businesses varies greatly.
In attempting to ensure that a tenant has a viable operation, Rumbold suggests that landlords take care not to duplicate businesses already in a shopping centre or nearby in a shopping strip.
And landlords should satisfy themselves that a would-be tenant’s type of business is likely to generate enough income to succeed. Rumbold gives the example of a video outlet wanting to rent a shop. He says a landlord who believes that the internet is taking over from video shops might favour a tenant with a different type of business.
5. Get the basics right: Whether you are a residential, commercial or industrial landlord, there are a range of basic dos and don’ts that should be followed without fail, Rumbold emphasises.
These include don’t try to charge above market rents, look after good tenants, and don’t put tenants into properties they can’t afford.
Rumbold says landlords can only get away charging above-market rents for a short time – if at all. “If tenants can’t or are unwilling to pay their rent, you are wasting your time as a property owner.” He stresses that rents are dictated by the market and landlords should charge whatever rents they think the market will bear.6. Buy smart:
He says some landlords have geared their properties to their previous rental income but are now being forced to sell if their rents returns have fallen.
On behalf of some SMSF investors, Johnston is looking at buying 11 neighbouring strip shops in a Victorian regional town. “The owner is obviously struggling,” he says.
Johnston underlines the need to have a good mix of neighbouring tenants – whether buying a single shop or several shops.
Simon Wheatley, executive director for real estate research at Goldman Sachs, says buyers of property in shopping strips should ideally seek property with a long lease in place. “If a property has a short-term lease or a rent review coming in the short-term, your risks would generally increase,” he says.
When assessing a property to possibly buy, Rumbold suggests asking such questions as: “How many people are going to walk past the shop every day? How busy is the location? How successful are the adjacent tenants? What is the condition of the building? Where is the parking?”
Parking is a particularly important issue for the success or otherwise of a retail investment. “Most people still drive to shopping centres,” Rumbold says. This means that shops in locations with poor parking should ideally be near a train station or supermarket or something else that will generate potential customers.
“Otherwise, you could find yourself in a low-traffic area that struggles to attract good business,” Rumbold adds.
Smart buyers of retail property also make themselves aware of any planned changes in a location that could either weaken or strengthen the viability of a retail investment.
Check, for instance, whether a new supermarket is being built nearby – it could be positive or a negative for your intended investment. And keep in mind that changes to traffic conditions could affect the number of shoppers in an area.
Photo courtesy of Tourism Victoria
