Leasing Redesigned: Can flexibility increase returns?


It may sound obvious, but fashions have changed since the 1950s, a decade known for pleated shirts and billowy skirts.  Something that hasn’t changed very much is English property law.  When the 1954 Landlord and Tenant Act was first introduced, it was designed to give business tenants protection from having their leases terminated at expiry.  By contrast, in today’s fast changing retail world, many retailers would willingly bring their leases to a premature end - to relocate, upsize, downsize, or shut shop altogether. 

Given only the nimblest of retailers are thriving in today’s environment, whether it’s Boohoo via the internet or Primark via a store network, what is clear is that brands need to be able to change their product and their platform quickly.

This is the third in a series of blogs on leasing structures and landlord-tenant partnerships where we explore how leasing structures can support change in shopping centres and in turn help their future value.

Retail needs a hands-on approach

Property is more operational than it has ever been before - take flexible workspace, student accommodation and hospitality to name a few sectors where landlords derive income from an operating profit rather than a traditional lease.  Yet within the retail sector, despite having undergone radical change in recent years, the traditional lease remains the norm.  Around 10 years ago I was involved in valuing a medium sized shopping centre in the north of England, with tenants including Bhs, New Look, Evans and an HMV.  Today, thanks to an unfortunate combination of factors, the value of the centre is a fraction of its former level.  The pursuit of national covenants perceived strong at the time, with standard lease structures and limited visibility of trading performance contributed to its decline over the longer term.

Leasing Redesigned 1

The success of the outlet sector is partly due to the number of brands expanding their outlet channel (in contrast to their full price stores), but success can also be attributed to the amount of re-leasing and re-merchandising that takes place.  It is not uncommon for 10% of a good outlet centre’s floorspace to be re-leased in any given year, enabling it to offer customers the most demanded brands.  All leases are “contracted out” of the 1954 Act, there is full visibility of tenant turnover, and performance-based thresholds enable the landlord to work with or exit underperforming brands.  In short, it is an easier framework to enable change.  The ability to keep the brand mix alive has never been more important, and sometimes the smaller and emerging brands are just as powerful in generating customer interest as established brands.

“Without continual growth and progress, such words as improvement…and success have no meaning” – Benjamin Franklin

Some of the places that have shown the greatest retail innovation in recent years are not found in major cities or prime shopping centres, but instead found in less well-publicised locations.  Arts-led regenerations such as Hebden Bridge in West Yorkshire, Hockley in Nottingham, Halifax’s Piece Hall, Birmingham’s Custard Factory – are full of independent brands, diverse food offers and events programmes.  Such places are admittedly not just about retail, they attract visitors for multiple reasons, but the retail found in these locations seems well-placed for future growth as consumers adjust their preferences and shopping habits.  For example, vintage fashion is rarely found in mainstream shopping locations, yet is gaining popularity as consumers buy more sustainably.  Rapidly expanding online, re-sale items are no longer just found on eBay or Etsy.  Farfetch, the online luxury retail platform recently launched “Second Life” where they sell second hand designer bags, which suggests they too see growth in the re-sale market.

Leasing Redesigned 2

Consumers are increasingly seeking individualistic rather than collectivistic fashion, and the major fashion houses of Zara, Primark and H&M are responding to this by offering rapid product line changes and launching sub-brands, but let’s not forget the burgeoning number of independent brands.  As customers become increasingly conscious of ethics and sustainability, locally made products have the potential to capture greater market share.  Whilst their starting point may be one of the online platforms such as Zalando, Not-on-The-High-Street or Etsy, many of these brands will progress to physical retail as their businesses evolve.  Their first move into physical real estate will need to be affordable and on flexible terms, whether in a stand-alone store or in a shared space, yet the supply of good space available to start-up brands is limited, partly because landlords generally prefer to engage with more established retailers. 

Leasing Redesigned 3

"Life’s a game of give and take" – Marvin Gaye

Evidence is beginning to emerge of landlords offering fully fitted “ready-to-go” retail units designed for shorter-term occupancy where a brand is testing a new market or requiring a store for a single season.  Rather than necessarily posing a risk, such an approach would diversify the occupier base, keep the brand mix interesting and potentially attract new customers and therefore new brands.  Any business opening their first store is likely to need guidance on merchandising and operations, but shopping centre landlords aren’t generally set up to provide this.  Landlords could fulfil this role if they expanded their management team to include retail advisers, and whilst this would incur cost, it could pay off if the rent is linked to the tenant’s turnover. 

As retailers are forced to become more responsive to their customers’ demands in order to survive, stores are likely to open in new locations or cease trading with greater frequency.  Maintaining and growing capital value in retail real estate will therefore require a partnership between landlords and tenants, more active landlord involvement and a leasing structure that facilitates rather than hinders change.  If physical retail is to remain the primary channel for retailers, they will need to occupy the right space at the right price, but for landlords to justify the investment required to create this, they will, at the very least, require transparency of tenants’ performance and a share of the upside when it arrives.

For further information on retail valuations contact Jonathan Adams and watch out for our next piece on the changing global retail landscape.