Recently Mike Ashley described the UK’s high streets as “at the bottom of the swimming pool, dead”, so if I said there was an area of the retail property market that has seen rental increases of 30-40% over the last five years, you might be surprised.
Retail property is often associated with oversized stores, dated shop-fits, over-renting and CVAs, so it’s no wonder investors are nervous right now. Not only impacted by the internet, the UK retail sector has struggled with headwinds in the form of imported inflation, increases to the living wage and business rates that have reduced rather slowly, or continued to increase.
This is the second in a series of blogs on leasing structures and landlord-tenant partnerships, here we principally explore the outlet sector and why it has seen enviable turnover and rental income growth in contrast to the wider retail sector.
Misleadingly perceived to be recession-friendly discount centres, designer outlets have enjoyed success for many reasons, not least because of their lease structures. Although no different in length (five to ten years), flexibility is built-in whereby the landlord – and in some cases tenant – can break the lease when sales turnover falls below a specified level. Inclusion of this provision helps to keep the brand mix on-trend, where underperformers can be rightsized, exited by agreement or improved with the assistance of the landlord’s own team of retail advisers.
Outlet centres have undeniably benefited from a rising number of quality brands embracing outlet as a channel, particularly higher price point fashion, beauty and lifestyle brands. Standards of stock packages, merchandising and shop-fit have improved over the years and now in many stores the only difference a customer would notice is the price tag. Importantly, interests are aligned between landlord and tenant, with rent based on turnover and the landlord providing extensive marketing input, retail advice for the brands when they need it, and a comprehensive diary of events and campaigns.
Admittedly not every brand wants a landlord’s input into its day-to-day operations, so the outlet model may have its limitations in a traditional full price retail environment. Nevertheless, sharing turnover data can help identify and manage potential tenant failures and rightsizing or exiting underperforming occupiers can avert or delay the risk of covenant failure.
Data is becoming ever more central to retail and to brands’ location decisions, and having full clarity of turnover information means a landlord can measure the impact of a new brand’s arrival on other brands in the same centre; similarly, the impact of events, campaigns etc can also be quantified and used to refine and improve future strategy.
Shorter leases and turnover rents are becoming more commonplace in all retail property, but rather than being proactively sought by landlords they have often been accepted in the absence of a better offer. Further, some brands – often the successful ones – don’t like turnover rents because they can erode profits. Why pay more when you don’t have to? Partial roll out of such a leasing strategy will always be a challenge as it gives a mixed signal to the market; outlets have used it as a blueprint from the start and it is considered standard practice; if this structure became the norm in full price, perhaps some of these hurdles would be easier to overcome.
It is not without risk, clearly, as turnover rent can go down as well as up and nobody yet (as far as I know) has found a way of convincing a brand to share some of their online sales generated by brand awareness from their store. The outlet sector has generally (but not always) operated in a different mindset to full price, and at the heart of this is the landlord and tenant relationship, which is founded principally on partnership rather than opposition. Clearly each side will negotiate to their advantage, but in the challenging retail environment we find ourselves in, which is neither temporary nor cyclical, working together by sharing data, expertise and rewards, would seem to increase the odds of success.
My next blog will explore what the future shopping centre might contain and how flexibility leasing structures might support it.