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24 BUSINESS THROUGH INNOVATION RETAIL MANAGEMENT RESETTING RETAIL RENTS IN THE NEW NORMAL ERA etail landlords are conceding ground to tenants up front on new deals struck following the disruption of Covid-19 but are determined to hold the line on the basic structure of leases, guaranteeing them annual rental increments. They’re not granting new turnover-type arrangements in new leases. The new lease deals ASX-listed landlords such as the Scentre Group (operator of Westfield malls) and Vicinity Centres have been striking new lease agreements at about 13 per cent lower as their tenants recover from the turmoil of the pandemic. In fact, according to analyst Sholto Maconochie at multinational financial services company Jefferies, the rents may have a further 10 to 15 per cent to drop. Australian Retailers Association (ARA) CEO Paul Zahra is adamant that a longer-term shift in the balance of power between retailers and their landlords is well underway. He says the golden days of landlords milking retailers are gone. In Sydney and Melbourne CBDs, where foot traffic and sales at specialty retailers have plummeted because of the absence of office workers and international travellers, some retailers are winning 60 per cent rent cuts from landlords desperate to keep premises occupied. Leading the push for lower rents is Solomon Lew’s Premier Investments, which has frustrated major shopping centre landlords by refusing to pay rents while stores were closed and demanding that future rents be based on a percentage of sales. Premier’s tough stance has paid off. The owner of Smiggle, Just Jeans, Peter Alexander, Jay Jays and Portmans has achieved $22 million in rent rebatements and concessions in the six months ending January. It has also negotiated ‘normalised’ rent reductions that are expected to cut its annual rental bill by almost $30 million to $200 million. Premier’s rent will fall to 13.7 per cent of sales compared with 17.7 per cent in 2019 and more than 20 per cent some five years ago. Premier has been able to achieve these strong outcomes because of the way landlords recognise its financial strength, its seven iconic brands, its fast-growing online business and its willingness to close stores unless rents were reduced. Landlords resist lease changes Despite such moves, landlords haven’t caved in under pressure to change the fundamental structure of leases towards turnover-style arrangements, which levy rent as a proportion of tenants’ sales, exposing the property owner to the vicissitudes of the retail sector. Westfield CEO Peter Allen recently said at the company’s annual meeting that the structure of its leases had not changed and remained based on the mutual agreement between the parties to pay a fixed base rent. This arrangement is a position fully supported by Westfield’s debt and equity investors, who don’t want to take on any retailer risk. Mr Allen didn’t budge despite pressure from retailers, including Premier, and the ARA, which recently claimed victory in its quest for lower rents, with five to 10 per cent reductions being achieved for short-term lease renewals and 15 to 20 per cent discounts for new leases as the pandemic forced landlords to the negotiating table. The landlords’ resistance to the push by some retailers for a shift to turnover rents means their income will eventually recover through fixed annual increases made up of initially discounted deals. The landlords’ position is that if there was a move to turnover rents, they feel they would be subsidising retail rents. Landlords such as John Gandel, who co-owns Chadstone Shopping Centre in Melbourne, say if turnover rents were to apply, then retailers wouldn’t even have to try and make a business work. What this means for pharmacy operators Landlords will continue to resist the push by retailers to have turnover provisions in their leases. However, rents are clearly being reset in this post-Covid era. Pharmacy operators must push their individual landlords to ensure they get a rental reduction. Some landlords will initially try to go the other way and insist that pharmacy operators pay more (to make up for landlord losses on rents with other retailers). Pharmacy operators are now seen as being more valuable to landlords keen to reinvigorate and improve their customer traffic in their shopping centres and buildings. Landlords are willing to reduce rents where they see retailers with brands or retail operations that will generate strong foot traffic and sales growth. Pharmacy operators must ensure that they’re a part of this long-term shift in the balance of power between retailers and their landlords, which is well underway. Landlords are working hard to make their centres and buildings more relevant to retain customers, who are choosing to shop more and more online since the pandemic. New lease deals by pharmacy operators must be negotiated with these changes in market conditions. References Lenaghan N. ‘Retail landlords resist lease changes’. The Australian, 9/4/21. Mitchell S, Bleby M. ‘Retailers win battle as rents reset’. Australian Financial Review, 8/4/21. 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 • JUN 2021