Retailers start calling the shots on rents

Rather than having empty shops, retail landlords are doing the unthinkable and dropping rents

A BRIEF announcement last month to say that the independent retailers’ representative body, Retail Excellence Ireland (REI), had appointed a single Dublin estate agent to handle all future negotiations on rents and leases may well signal a radical change in relations between landlords and tenants.

The move comes at a time when a substantial number of retailers are defaulting on rents – mainly in shopping centres and retail parks – and landlords are coming under increasing pressure to cut rents.

REI’s decision to flex its muscles coincides with the most serious downturn in consumer spending for over two decades. The organisation’s 580 members operate over 8,000 stores throughout the country, from chemists to coffee shops, fashion outlets to furniture stores and convenience shopping to electrical goods.

The decision to centralise future negotiations on rents for the entire group is designed to keep increases to a minimum and to provide greater transparency on rent levels along high streets, as well as in shopping centres and retail parks.

In particular, the organisation wants to “regulate” side agreements which, it says, “falsely inflate market rents”. REI also plans to campaign for the ending of upwards-only rent reviews – an issue which has already attracted the attention of the Green Party. REI has already identified a number of instances – the latest in Cork – where landlords have agreed higher rents under a “sweetheart deal” with tenants to establish a precedent for moving all other rents upwards.

Jack Devlin of GVA Donal O Buachalla, who is handling rent negotiations for REI members, says it is seeking rent reductions of 15 to 50 per cent right across the country because of the unprecedented downturn in consumer spending. Traders had to contend with lower profit margins at a time when the burden of rates was rising along with higher insurance and service charges.

“Landlords are increasingly being pragmatic about this problem and acknowledge that, as leases are long term relationships, they need to protect their investments and their rent roll. They are prepared to consider rent reductions. This is happening right across the board,” says Devlin.

A handful of multiple traders – including the Irish arms of fashion house Principles and shoe shop chain Barratts – have run into trading difficulties in recent weeks but many other lesser-known businesses have also closed since Christmas on high streets and in shopping centres.

As the body count rises in the retail sector, even traditionally prosperous streets and normally busy provincial shopping centres are becoming pock-marked with empty shops. Many mainstream retailers are grappling with anaemic sales, rising costs and nervous banks. The last thing they want to do is expand into the space that is opening up, even if rents are dropping. Several retail companies, ambitious enough to pitch for new trading locations, have been refused funding by their banks for fit-out costs and stock – not because of the change in consumer sentiment, but because of the credit crunch.

Some retailers seriously affected by the 20 per cent fall-off in consumer spending and still anxious to stay in business have sought radical changes in the way they pay their landlords. Instead of a set three-monthly rent paid in advance, they are now pushing to pay a fraction of the rent and the balance based on turnover.

Aidan Grimes of Bannon Commercial says this effectively means that the traders want the landlord to bankroll their businesses.

“That is the way things are evolving. I can see more and more people moving to this American model where shorter leases are offered and the landlord gets a percentage of the turnover instead of a rent. That is already happening in retail malls, like Kildare and Banbridge, and the same thing will happen in shopping centres,” says Grimes.

Larry Brennan of Savills says companies formed to take over some of the UK multiples which had gone into administration had sought permission from the landlords to switch to a rent payment based on 3–7 per cent of the turnover. “They were told to shag off by both Irish and UK landlords.”

He said there had been a marked increase in the number of tenants approaching landlords to discuss cash flow and trading issues. Tenants were raising issues, such as monthly as opposed to quarterly rental payments, rent deferrals and in some cases they were seeking either rent reductions or the inclusion of a turnover element or other trade-related payment in their leases.

“We recognise the importance of tenant relationships in the schemes we manage and, in particular, the importance of keeping strong retailers and attractive retail offers trading. That said, we also must acknowledge the major financial obligations of the landlords and developers of these shopping schemes,” says Brennan.

He said their policy was to review each approach on its own merits and consider them having regard to the desirability of the retail offer, its long-term viability and how this approach aligns with the commitments of the landlord. “In all cases we have asked tenants to provide full and detailed financial information to back up their position, as opposed to dealing with the blanket reduction requests that have been made by certain retail chains and groups which take no account of the individual trading performance of stores and locations.”

With no less than six leases for sale on Dublin’s Grafton Street – and little interest in them – it will undoubtedly be difficult to sustain excessive rent levels on the street. A great many landlords have been approached to reduce rents and while some are apparently willing to consider it – rather than the prospect of a lengthy rent void – the institutions which own most of the buildings are generally unresponsive because of the likely knock-on effects on their pension funds.

Rent defaults have been most common in the lesser known shopping centres in the Dublin suburbs, as well as in many provincial shopping centres. One of the owners of a shopping centre in the Dublin area, who asked not to be identified, said that only 40 per cent of their rent roll was coming in because of the fall-off in sales.

Kevin Sweeney of Bannon said a minority of traders were questioning the sustainability of rents in a small number of shopping centres. These complaints generally came from individual traders rather than multiples who had shops in provincial centres that were “less successful”.

Aidan McDonnell of Colliers Jackson-Stops said that where tenants had approached them looking for a reduction in rent they had referred them on directly to the landlords. “I imagine most landlords want to do this privately.”

Marks & Spencer gets off to a flyer in Navan

DUNNES STORES and Tesco took something of a drubbing in Navan last weekend when Marks & Spencer opened its first Co Meath store at a local shopping centre.

Large crowds waited outside the new store for its opening and, in the following days, it continued to attract large numbers at the expense of the newly revamped Dunnes and the other British multiple Tesco which also trades out of the shopping centre.

Early visitors to M&S were treated to champagne and live music.

As well as a food hall and a café, the store carries a wide range of fashion and accessories for men, women and children.

M&S is believed to be paying a staggered rent which will rise to €480,000 for the two-storey store which has a floor area of 2,600sq m (27,995sq ft).

Karl Stewart of DTZ Sherry FitzGerald, who handled the letting, said executives of MS were overwhelmed by the level of business in the opening days.

Competition in the Navan food market is set to become even tougher for Dunnes and Tesco later this year as the two German discounters, Aldi and Lidl, are due to open stores in the town.