Rising property costs

1 December 1999

Dec 1999 – In the open market, some retailers, for whatever reason, can afford to pay suppliers – ie, landlords – more rent than others. Whilst each individual agreement is nothing to do with anyone other than the parties involved, rising property costs for everyone suggests something fundamentally wrong.

The obvious problem is that, because leasing terms and upward-only reviews can remain fixed for years, no account can be taken of unforeseen consequences, such as external conditions or centre landlords not fulfilling promises. Varying a lease can require one party to give up advantage but, whilst immediate saving is relevant to tenants, landlords often receive the real benefit. (Consider the Landlord and Tenant (Covenants) Act 1995: removing privity of contract from common law to help a few victims means all tenants now considerably worse off.) The only time that reality is taken into account is at rent review and lease renewal, but even then landlords prefer hypothesis because, as lease analysis works both ways, connotations conveying advantages to the tenant can undermine investment performance, so may landlords manipulate evidence to avoid the possibility that they should experience the sort of insecurities and uncertainties that tenants face daily.

Another is indifference. Landlords can find out from other landlords what other tenants have agreed, but the main source is surveyors who see no harm in keeping landlords informed. It is reasoned that freely circulating evidence is the market’s ‘life-blood’ so in everyone’s interest to co-operate. The truth is that landlords and surveyors want tenants to play the property game by landlord rules. Denied knowledge of what other tenants are paying puts landlords at a disadvantage so surveyors, who also act for landlords, do not want tenants to opt out. Many tenants are themselves landlords and do not want to be alienated, but retailers would help themselves if transactions were not publicised, rental evidence disclosed only to surveyors reducing costs; and in a new lease and on renewal, require a covenant subjecting to tenant’s consent the release of tenancy facts to third parties.

Tenant demand also increases costs. Retailing is dynamic – the test of an idea is consumer response, not what Verdict thinks – so supply of suitable shops can be limited, especially in prime positions, but retailers create problems for themselves by thinking short-term. Passing trade is generally regarded as common property but, actually, most retailers rely more on passing trade generated by a few. By paying more rent, a hungry retailer raises the stakes and, via the knock-on effect of upward-only review, pressurises both competitors and complementary businesses. When controlling tenant-mix, landlords may deliberately let shops to ‘novelty’ retailers at higher rents to force out those retailers no longer regarded as complementary to investment objectives. Whatever the strategy, the downside is that, when trading expectations do not materialise, the troubled retailer is stuck with a liability, but the consequences also destabilise prospects for those retailers whose appeal to shoppers was, in fact, the source of the footfall. In secondary locations, ‘amateurs’ hoping to cash in boosted costs beyond economical and the trend is now damaging prime positions and malls.

Landlords expect tenants to adapt, but why should retailers affected by uneconomical costs be accommodating? No longer is the answer ‘nowhere else to go’, because the progressive are discovering two pleasures of relationship marketing – ie, why help other retailers and bother with the mass market? As forward-thinking retailers join the exodus, parasites expecting rich pickings to continue indefinitely are instead caught in a vicious circle of falling demand and rising costs. For landlords, pain is dearth of impervious multiples or independents with ‘deep pockets’. Everything boils down to attitudes, but that so many retailers are now experiencing lower profits suggests they and their surveyors are better at thinking like landlords – or simply not thinking it through at all.

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