Page 36 - Retail Pharmacy Magazine October 2020

34 BUSINESS THROUGH INNOVATION RETAIL MANAGEMENT SRENT WAR RAGES OVER RISKS AND RETURNS truggling Australian retailers pushed to breaking point by the coronavirus pandemic are staring down their powerful landlords over rents. Neither side is flinching, with both having plenty to lose. The battle between shopping centre landlords and retailers is entering a new and potentially more dangerous phase as the nation’s largest retail property company is sending a message to larger retail chains that are refusing to pay rent. Retailers are being called out by Westfield for refusing to pay rent while they collect the JobKeeper subsidy and trade profitably. Westfield recently locked out fashion chain Mosaic Brands, which has been at the centre of the movement to ensure that the commercial property industry doesn’t bear a disproportionate cost during the pandemic. The conflict between retailers and landlords has been years in the making but has been accelerated by the disruption of the pandemic. It’s an argument over how risks and returns should be shared in the retail sector. It has turned into a fight over the price of space, both physical and virtual. Some retailers, such as Peter Sheppard with his high-end women’s shoe stores, believe we are experiencing a paradigm shift in retailing around the world. As the argument plays out between landlords and retailers, its catalyst has been the demand for rent relief. Small and medium-sized businesses are being protected from eviction under the pandemic regulations that allow for proportionate reductions in rent. Mr Sheppard is trying to avoid paying rent during closures and seeking a deal to pay rent, once stores reopen, at a proportional rate based on payments in corresponding months a year earlier. The big landlords fear the structure of any relief deals could set in train a broader restructure of retail rents, moving away from the conventional leases with set rents and fixed annual increases towards rents linked to turnover. This is a model being pushed aggressively by Solomon Lew’s Premier Investments. Westfield operator Scentre Group has issued a strong warning on its right to collect rent and its commitment to conventional retail leases after it recorded a $3.6 billion loss in the six months to June 30, hurt by big write- downs for its mall portfolio. Scentre’s Peter Allen is adamant that the group won’t rework its traditional fixed rent leases into the style of turnover rents, which some retail groups such as Mosaic and Premier have been pushing. Mr Allen is keen for the rent relief regulations adopted by the stores to be closely targeted to smaller retailers: those with turnovers less than $5 million It’s difficult to see how some retailers would be successful in negotiating a proportional rent model with the larger landlords, such as Scentre. Investors in larger shopping centres are looking for certainty. Mr Allen seems determined to hold his ground that the idea of linking sales to rents is fundamentally wrong. Premier has said its earnings will rise 11 per cent this year to around $185 million despite temporarily closing 900 of its fashion stores and sending 7000 workers home with JobKeeper payments. Premier’s online sales have boomed while it refuses to pay rent – behaviour that has upset some landlords. Percentage rents replacing fixed rents would be surprising, although there may be some variations or nuances applied to the current system. Pharmacies, it seems, are well placed in the next six to 12 months to benefit in terms of new lease deals in response to the Covid crisis. What does this retail environment mean for pharmacy? Retail pharmacies are continuing to benefit from their ongoing classification as essential retail providers. The end of the retail rent war will only benefit pharmacies in the longer term. The market conditions remain favourable for retail pharmacies to secure fair and reasonable commercial terms. Landlords with the Covid-19 experience are now seeing the benefit of having community pharmacy in their retail strip or shopping centre. Now is the time to be negotiating hard with the right commercial terms to secure your long-term future. If you feel you don’t have the requisite skill and experience to negotiate the right commercial terms then engage an independent, experienced retail consultant. References 1. WilmotB.‘Westfieldownerstepsupretailwar’.The Australian, 26/8/20. 2. Lenaghan N. ‘Lines drawn in fierce battle over retail rents’. AFR, 29/8/20. 3. Thomson J. ‘Scentre digs in for protracted rent war’. AFR, 26/8/20. 4. Lenaghan N. ‘Tough talk as rent war flares’. AFR, 26/8/20. 5. Johansson S, Powell D. ‘Retailers seek some therapy as landlords play hardball’. SMH, 29/8/20. By Bruce Engeman. Professional Property Advocate Engeman Retail Bruce Engeman is an independent, professional property advocate who works exclusively for pharmacy operators. He started Engeman Retail in 2008 and has handled pharmacy negotiations hundreds of times over the past six years. Inquiries: bmengeman@bigpond.com or 0418 470 175. RETAIL PHARMACY • OCT 2020