With the retail property market slowing every week, retailers should in theory be in the driving seat. But, as last week’s Retail Week Property Directors’ Forum heard, the real picture is more complicated than that.
The shifting playing field between retailers and landlords dominated the day’s discussion. But, while landlords are becoming increasingly desperate to hold on to tenants and fill secondary units, it very much depends on the location.
With the balance of power shifting away from landlords, better deals for retailers are undoubtedly beginning to emerge. Flexibility from landlords, according to B&Q property director Terry Hartwell, is a luxury that exists when, like now, there is plenty of space to go around. He said: “Where space is plentiful, responsible landlords will listen to tenants. The problem is when you have a very competitive market where everyone’s outbidding each other.”
“Retailers ought to be in the driving seat given the conditions,” explained DLA Piper partner Valerie Mather. “All of the conditions that put landlords in control have now changed.”
But the situation is not that simple. While retailers are keen to secure more flexible terms from their landlords and the more scrupulous landlords are increasingly working more closely with their tenants. Landlords are still keen to secure the best deals and their approach varies depending on their own objectives.
However, whatever pressure landlords might be under to be more accommodating, expanding retailers still need to secure good space. The bottom line for the latter, according to 3 head of property Mark Selby is getting into a property; the terms of the lease can often be less important.
He said: “Flexibility is very important, but it comes down to how much you want that store and what you are willing to do to get it.”
IN IT FOR THE LONG HAUL
As Land Securities commercial director Ronan Faherty remarked, although the average length of a lease is now 7.2 years, that is not the length of time retailers actually intend to occupy the property. He said: “I can understand the requirement for flexibility, but I honestly don’t think a retailer taking a property thinks that they will be out in five years. The big challenge is finding a good balance for our investment. If you’re a long-term investor, you have to look at where the growth is going to come from.”
When it comes to landlords, retailers seem to take the view that you have to separate the good from the bad. Faherty made clear that Land Securities intends to pitch itself among the former by explaining his company’s strategy for improving relationships with retailers.
“We have a responsibility as a landlord and we don’t want any of our tenants to go bust,” he said. “If we can help each other in terms of leases, that should speed up the process for everyone.” He stressed that the company is willing to help those retailers struggling in its schemes if they need to get out. “It’s not in our interest to populate our developments with people who don’t want to be there.”
Faherty’s comments during the debate and in his own address to the forum were well received by most delegates, who welcomed the friendly noises coming from Land Securities.
But the discourse was not entirely harmonious, with several sessions revealing a split between retailers and landlords, particularly many of the private investor landlords, which now make up a large part of the property investment community.
“There are some very good landlords and some very bad ones,” said Matalan property director Jonathan Spaven, adding that it isn’t just about landlords. “The problem is with landlord’s representatives. There are some very proactive landlords, but between any tenant and landlord, there’s quite often a management company that might not be coming from the same direction. Landlords need to tell their managing agents what they need from their tenants.”
The perceived lack of approachability among landlords is an issue that Faherty tried to address. Landlords, he said, need to work together with retailers in order to reap the benefits available to both.
He said: “We are purveyors of space to the retail industry. Retailers are our most valued customers. I think that, in a challenging market, it’s very important to engage and discuss. This business never stands still.”
While the argument still rages over who is in the driving seat, delegates were reminded that, in these hard times, it is the consumer who is essentially in control.
“In the chain, consumers are at the front,” said Hartwell. “Our customers are choosing when and where to shop and we forget that at our peril. As you go down the supply chain, the retailer is next in line. It is a buyer’s market.”
A DISSERVICE?
During a tense debate, DSGi property director Mark Feltham also highlighted the thorny issue of service charges for retailers, which are crying out for costs to be reduced across the board yet have seen service charges rise steadily.
He remarked: “Our service charge is certainly increasing by about 7 per cent a year. We are looking for value for money, but it’s the landlords and the institutions that we never get to see who get a percentage of every penny we spend, so where’s the incentive to make it better for occupiers?”
Landlords were also accused by the retailers on the panel of wasting retailers’ money on ineffectual marketing. Consumers, according to Feltham, only come to a centre because of the retail offer, not the centre itself and landlords should only spend retailers’ money on advertising that works.
He said: “We spend a lot of money advertising, more than our landlords do. Many landlords don’t have any idea about what that does to your business.”
Achieving 50 per cent year-on-year growth, online sales was a backdrop to the day. DSGi, which owns Currys.digital and PC World, has been affected more than most retailers by the growing culture of internet shopping, having fully embraced it.
The rebranding of all but a few Dixons stores by DSGi in 2006 signified the retailer’s shrinking high street presence in favour of e-tail, a trend that Feltham hinted was set to continue.
“The reason we took Dixons off the high street is because we had a business that was accounting for less than 10 per cent of our revenue,” explained Feltham. “If I was a landlord, I would be concerned by DSGi’s future in terms of stores. Our business is now 12.5 per cent over the internet and we will take our business forward in any way.” The rise of internet retailing serves as yet another warning to landlords that retailers are increasingly calling the shots.
SPACE OVERLOAD?
With property at the heart of last year’s Sainsbury’s takeover attempts, the forum’s keynote speech from Sainsbury’s property director Peter Baguley was eagerly awaited.
Baguley reiterated the need for Sainsbury’s to retain control of its estate through freehold ownership, explaining how much more difficult store extensions and refurbishments become when a landlord’s consent is needed. He added, however, that the retailer is keen to enter into more property joint ventures, such as the deal it has done with Land Securities to exploit opportunities presented by new and existing sites more fully.
Retail property, he said, was in a tough position because of a number of factors. He identified the “triple whammy” effect of the US sub-prime crisis, the global credit crunch and the Northern Rock fiasco in the past year.
The slowdown, according to Baguley, is evident in the number of shopping centre investment deals taking place last year compared with 2006. In that year, 83 deals went through at a cost of£6.2 billion, but, in 2007, only 54 deals went through at a total of£4.7 billion, with 70 per cent of these taking place in the first half of the year.
With 35 million to 40 million sq ft (3.3 million to 3.7 million sq m) of retail space coming in the form of new developments over the next two to three years, there is a risk, he warned, of bringing far too much retail offering onto the market than there are consumers with money to spend. This is particularly true in less affluent areas, and he listed a host of smaller towns in the Northwest where new centres are opening in the coming years.
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