Amid the Covid-19 global pandemic, many retailers have experienced a demand shock in light of travel and movement restrictions. Landlords, however, have provided several relief measures to accommodate these retailers ranging from temporary rental holidays, rental reductions and deferments with some exploring lease restructuring and fit-out subsides.
While the short-term situation for retail is challenging, the disruption is expected to be positive for some, with essential retailers, such as grocery and home stores, experiencing a surge in online purchasing. However, we expect fashion and F&B retailers to continue to struggle for the medium term.
In addition, Covid-19 is pushing organisations to streamline supply chains, with retailers leveraging on existing infrastructure – using a designated area of the retail store to co-ordinate delivery & collections and investing in platforms to enhance digital channels. This has been successfully demonstrated in mature markets who are acting quickly in this change, but we have yet to see this come through within this region.
Moving forward, the pandemic is expected to accelerate the restructuring of retail lease agreements, potentially shifting agreements to:
- Shorter lease lengths, allowing landlords to ‘refresh’ centres and cater to customers ever changing demands.
- Turnover rents, possibly becoming the prevailing structure in retail lease agreements, and whilst this income is not fixed, the landlords will benefit from the retailer’s performance and can work together to improve the offering of the unit and the mall to equally benefit.
- Apportion online sales to landlords. Amid Covid-19, this topic is currently the most notable discussion point among landlords and retailers, globally.
- Include pandemic clauses.
If standard retail malls are going to take the route of these restructured lease agreements, landlords can look to the success of some of the strongest global outlet malls, such as La Vallee Village, France and Roermond Designer Outlet, Netherlands.
In the United Kingdom (UK), Bicester Village is an outlet destination shopping centre, providing luxury goods and designer clothing, and considered to be one of the UK’s top tourists attractions. The outlet is primarily driven on a turnover only model (with base rents becoming fixed as income received ratchets up). Many leases include tenant and landlord break options, based on the performance of the retailer, which allows for the offering within developments to change to suit the interests and demands of the customers.
RESTRUCTURING RETAIL LEASES
Restructuring of retail lease agreements, is anticipated to become increasingly popular during Covid-19 and beyond, helping to support the resilience of our retail development to future shocks, while at the same time promoting sensible rental growth and visibility on tenant performance. We are yet to see these restructured lease agreements within the Middle East and would hope to see this become more of a focus for retail landlords.
"There is a need to build resilience for retail development in the Middle East for the future."
Internationally, landlords often determine that it is in their own best interests to restructure leases. Just like other business owners, landlords act in their own best perceived interest. With this goal in mind, landlords must determine what will occur if the tenant does not obtain the relief sought. In many instances, the tenant will default, leaving the landlord to pursue remedies available under the lease, including remedies available against one or more guarantors. In other instances, tenants want changes to non-rent terms, often non-monetary terms. With some creative negotiating, the changes need not adversely affect the landlord.
As retail markets move towards more of a turnover only rental model, it is essentially for the valuers to have sight of the sales figures and performance of the retailers to understand the risk surrounding the income but also the potential for rental growth. Whilst the income is not fixed and therefore more of a risk to investors, there is also the potential for an upside when retailers are strongly performing, whereby the landlords will benefit from increased turnover and will not be capped by a base rent. This has been successful model for the Outlet Villages previously mentioned.
During these uncertain times within the retail market, CBRE ME can provide strategic guidance and optimal solutions, to our clients for all retail segments, utilising our market expertise and leveraging on our global network of Valuers, Capital Markets, Agency and Asset Management teams, subsequently offering a full range of services.
For more information on how we can help you, contact Emily or visist our Valuation services page.