Some retail tenants have the upper hand in rent negotiation

Duncan Johnston, executive chairman of Collins Booksellers, cannot quite believe the rent-crunching deal just negotiated for one of the chain’s bookshops to take a large space in a top Westfield shopping centre. 

Johnston says Collins has negotiated a 50% reduction on the rent paid by the previous tenant, Angus & Robertson. “They came chasing us,” says Johnston. “They really wanted a bookshop.” 

While Johnston says the big shopping centres can really “take a hit” when a major tenant fails, he readily agrees that shopping strips are being much worst hit as shoppers effectively go on strike. 

The plight facing retail landlords and retailers was starkly documented this month when the Australian Bureau of Statistics released its June quarter retail trade figures showing that sales rose by only 2.6% in 2011-12. This is the slowest annual growth in 50 years. 

Countless landlords in shopping strips are immediately facing rising vacancy rates, falling rents and departing tenants while heavyweight shopping centre landlords remain relatively insulated – at least over the short-term. 

This is widening the gulf in the fortunes of shopping centres and shopping strips. 

Johnston says Collins would have had had more approaches in the past three weeks than over the past 12 months from landlords asking the chain to take leases on vacant strip shops in the Melbourne CBD. 

Simon Wheatley, executive director for real estate research at Goldman Sachs, says shopping centre landlords are relatively cushioned from the retail downturn, in part because just 2% of their revenue is from turnover rents. The remainder flows from rents set in their long-term leases, which allow for annual rate rises. 

And generally major shopping centres can immediately fill vacancies left open by departing tenants. But, in some cases, the centres may have to offer special deals to win particular types of tenants – as illustrated by the sharply discounted rent recently negotiated by Collins. 

However, Wheatley emphasises that the big shopping centres will only remain cushioned for a limited time. “The occupancy cost ratios – the rent and outgoings as a percentage of total sales – have gone from about 15% for regional malls in 2005 to about 18% now, he says. 

“That’s a fairly substantial increase and is not sustainable long-term,” he says. “It is sustainable now because arrears levels are fairly low and we are seeing virtually no vacancies in shopping centres.”

Tomorrow Property Observer will give six tips for retail landlords.

Photograph by Ben King, courtesy of Tourism Victoria