A Radical Solution to Retail InnovationBY Phillip Chapman
Here is an innovative way of addressing the market inequities between a Landlord and Retailers: below is an extract from a recent article from Dennis Price which needs more airtime and a lot more input from the Industry-he just maybe on to something here!
“The ‘market’ will force alignment in the respective fortunes of the retailer and the landlord, so we have come up with clunky coping mechanisms to re-balance things by introducing friction costs.
The current system (with specialty leases) has considerable inefficiencies caused by the (a) different investment and performance profiles of landlords vs tenants, and the resultant friction costs. These retailers are sharing these friction costs (positive and negative) incurred to the landlord, but there is no such thing a free lunch – and ‘security of covenant’ has a hefty price.
The cost usually comes in the form of fitout incentives as landlords are investing heavily in start-up by funding fitout costs. In the downturns, abatements increase. This is offset by turnover rents during the good times, which never seems to come around.
One solution is to adopt an ‘agile’ lease structure. In brief, an ‘agile’ lease is one where the key commercial terms like (i) trading hours (ii) usage clauses (iii) rent and (iv) covenantors etc. are treated as a set of clauses (a term sheet) that may change rapidly and frequently – allowing for some agility to innovate. Coupled with this, there is an agreed process to that allows for quick and cost-effective varying of this term sheet in response to changing market conditions.
The other parts of the lease (that hardly gets read) can remain fixed and is in place to manage risk, liability etc. However, by adopting a lease that is designed to accommodate adaptation and a process that is geared toward achieving that.
The first, obvious major objection is that it will turn the entire shopping centre into a giant casual leasing arena. And the perceived lack of ‘security’ of income will tempt you not to read any further. But there is a method in the madness.
Of course this is a hypothetical solution, and there is very material fact that the Retail Leases Act is perpetuating the status quo, leaving little wriggle room for actual innovation.
The reasons why AGILE LEASING won’t work that will be considered are:
- Retailers will lie about their figures
- It will be too hard to administer
- Retailers want certainty too
- Property investors won’t accept that as a risk profile
- It will make retail and retail property the same investment profile
- It will make the mall one giant, pop-up space
I argue that an agile lease structure would align return profiles and achieve key outcomes:
- It negates some of the advantage of investing retail property as opposed to direct retail investment
- But you gain /maintain strength by being able to have investment risk spread over multiple retail categories
- And you gain upside by being exposed to the latest/greatest concepts (without capital investment)
Some may argue that property investors want a certain risk profile. I argue that:
- The cost of de-risking for retail volatility is too big
- Retail property performance is tied to retailer fortunes anyway, this merely makes it more transparent
- De-risking investment can be done more effectively with share allocation/ index funds than merely relying on lag factors. (And, as soon as retailer start doing it tough, the good investment managers are probably factoring that into retail property investment prices well in advance)
Most challenges can be overcome if we want to do it and we have the technology to do it.
The inflexibility of the lease is a major inhibitor of innovation, and innovation is in real short supply at the moment.”
Click here for the full article, let’s help Dennis start the conversation.Need leasing advice or management services? The ARA has partnered with Lease1 to save retail tenants time, money and stress in their lease negotiations. To learn more about ARA Leasing Services contact http://lease1.pages.ontraport.net/enquiry or email firstname.lastname@example.org.
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