Australian Retailers Association chief executive Paul Zahra has flatly rejected a proposal by Vicinity Centres boss Grant Kelley that rental agreements include a base rent plus a variable component based on a proportion of a tenant’s online sales.
Both were speaking on a panel as part of the The Australian Financial Review Virtual Retail Summit, which highlighted starkly differing views among tenants and landlords about how retail rents should be structured in a post-COVID-19 world.
Mr Kelley rejected billionaire retailer Solomon Lew’s suggestion that tenants such as his Premier Investments only pay rent based on a proportion of turnover, but said a future rent structure could be a “combination of base rent plus some upside perhaps associated with online [sales].
“I think we need to no longer regard [retail] space as a physical construct but as a virtual construct,” Mr Kelley said.
“In other words we attach to our physical proposition the online ‘share of mind’ that we get through being the role of a showroom or being an element of the click and collect structure.”
But there would always be a base load of rent that landlords had to underwrite, Mr Kelley said, and which “our investors and creditors require us to do”.
He also earlier stressed that landlords had actively waived rent – not just deferred it – something not even the banks had done.
In response Mr Zahra, the former boss of David Jones, said he was amazed at Mr Kelley’s rent structure suggestion.
“I am not sure there would be too many retailers that would be agreeing to a landlord taking a percentage of online sales when mostly retailers are fulfilling that product from a warehouse.
“They would almost be paying double rent – [rent on] the warehouse and then [rent on] the store.”
Instead, Mr Zahra said, the overwhelming majority of retailers wanted a variable rent structure “where landlords and retailers share on the upside and they also suffer on the downside”, such as what happened during the pandemic.
The jousting continued with Mr Kelley claiming that two-thirds of online fulfilment actually happens through click-and-collect within stores in shopping centres.
“It’s quite a legitimate debate, Paul, to have with your respective constituents,” he said.
Rents that only go up ‘are gone’
But Mr Zahra fired back, saying click-and-collect was separate from online sales because goods were collected by a consumer, inventory came from within the store and the sale was registered at the store.
“You’re talking about an online facility and actually taking clippings [of revenue].”
Julia Forrest, portfolio manager at investment house Pendal Group, did not agree on turnover-based rent: “I don’t invest in office buildings and get a percentage of what law firms bill.”
Speaking on the same panel, Kmart Group managing director Ian Bailey said finding an equilibrium and balance was important.
But he said one thing that was certain was that “the days of long-term rent[al agreements] that can only go up are gone”.
“None of us are going to be signing anything like that in the future because what this period of time has told us is things can happen where sales decline completely outside of the control of the retailer and rents do not.
“And if you stand back and look at that as somebody running a company, you just cannot have that outcome. So I think inevitably we’re going to be looking at shorter-term leases and I think inevitably we will be looking for mechanisms where rental payments can go up and down,” Mr Bailey said.
Julia Forrest, portfolio manager at investment house Pendal Group, backed the position of Mr Kelley.
She said retailers paying rent purely as a percentage of turnover did not work for investors.
“Well I think certainly in the short term a percentage of the rent could be based on turnover, fundamentally as an investor we’d like to see a substantial amount of the rent being the base rent,” Ms Forrest said.
“I mean I don’t invest in office buildings and get a percentage of what law firms bill.
“I think for landlords their job is really to generate foot traffic and for retailers their job is really to convert that foot traffic to sales … to come out of this with a model of just purely percentage rent is a bit idealistic.”
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