New research highlights the fact that UK rents are still absorbing too much of retailers’ takings, compared to other international markets.
International property advisor Savills has called for greater flexibility in the landlord/tenant relationship to accommodate the growing correlation in the market between an occupier’s trading performance from a site and the level of rent that will be generated for the landlord. According to its latest retail bulletin, where UK methods of zoning or charging overall rates per square foot are rigidly adopted, this can lead to some prime stores being undervalued and mediocre to poor properties overvalued.
The research highlights that UK occupational overheads for retail property are approximately 20 per cent of turnover and can represent nearly 40 per cent of retailers’ total costs. This, Savills argues, stands at a significantly higher level than in the US and other European countries. For example in Spain shopping centre rents average 10-15 per cent of retailer turnover.
Even allowing for the UK’s population density and the sophisticated mature market conditions in which UK retailing operates, this differential is telling. The report urges landlords and retailers to work together to better understand the link between retail profitability and property values.
Chris Blair, Savills’ UK head of retail agency, said: “Campaigns for monthly rents, rates phasing and service charge reductions are all initiatives with a sound commercial base, but in practice they are side shows surrounding the bigger issue of assessing sustainable rental levels.
“We must encourage retailers to be more open with their figures to initiate a structural change away from outdated valuation practices. This would be good for retailers in aligning overheads more directly with trading performance, but would also benefit landlords in boosting values for the best properties and preventing tenant insolvencies in cases where rents are too high.”
Savills’ report also outlines the weakened shopping centre investment market, which it states has been affected by levels of negative sentiment in the wider economy, and also by uncertainty about rental values. It reveals only five transactions were completed in the first quarter of 2009 totalling £741.7m, and this figure is largely boosted by the 50 per cent stake sale in Meadowhall for £587.2m.
It highlights that of the deals transacted, all were either acquired by UK institutions or where a vendor loan was available. It confirmed US opportunity funds are wishing to enter the market, but almost all need a debt facility and are not yet able to agree a pricing level with the vendor.
Nick Hart, Savills’ head of shopping centre investment, said: “Prospective investors are applying very bearish assumptions in cashflows when relating to vacant units, leasing assumptions, capital expenditure and rental decline or growth prospects in the short to medium term. We have already seen a 43 per cent fall in overall values and 23 shopping centres failed to sell in the last 12 months.
“With banks favouring a ‘work out’ route this is an opportunity for asset managers. Rental levels need to be addressed in order to see strong investor sentiment return to this market.”
