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New retail rental solution on the horizon

QD view - budget baloney

The subject of turnover rents resurfaced this week with reports that high street fashion chain New Look was in crunch talks with landlords about restructuring its leases to turnover-based rents.

The proposals reflect a fast-growing trend in the retail sector, but how do they work and what does it mean for landlords?

Turnover rents link traditional rents to individual store sales. So the basic rent will be a lower level and topped up depending on the success of the store.

Not particularly appealing for landlords in the current retail landscape, even before the covid-19 pandemic. But it is better than having vacant stores. Other retailers such as Pret a Manger are also pushing for turnover rents.

It is clear that landlords and retailers need to come together to work through the high-street woes, as the problem isn’t going away and the majority of current rents are unsustainable for most retailers.

Turnover rents, which typically range between 8% and 12% of store sales, will undoubtedly see overall rental income fall for most stores, but for some in prime locations, such as in central London and high footfall locations in regional cities, overall income could increase.

What is sure to happen with turnover rents is a collaboration between landlord and retailer. Both parties have as much of an interest in the success of the retailer and the location.

With turnover rents, no longer can the landlord just sit back and collect the rent each quarter. That means taking a hands-on approach and having retail expertise. Most listed property companies focused on the retail sector already have this expertise.

It is likely that it will only be applicable to shopping centre owners, who can apply it across the whole scheme.

There are advantages to the landlord of turnover rents.

It has been highly successful in the outlet centre segment of retail, places such as Bicester Village and the London Design Outlet in Wembley, which has consistently been the star performer in the retail sector over the last few years.

The fundamental advantage with turnover rents is that they capture income growth annually (if any). The typically short lease lengths give landlords the ability to swap out tired or failing retailers and introduce new brands to their shopping centres that reflect changing consumer preferences.

Turnover rents also give the landlord real-time sales data from every retailer in its portfolio. This data is gold dust to landlords, and provides them with a dynamic management tool that can drive income.

A sticking point with turnover rents is how to differentiate and securely monitor data on sales that have been made in-store but bought online. For example, if a customer tries out a new gadget in the store and then buys it online, where is that included in the retailer’s sales figures?

This is a serious concern for landlords and needs to be worked through with retailers. There is no one-size fits all solution for this and will be different for each individual retailer.

As turnover rents become more prominent in the retail sector, landlords will have to make it work for them.

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