Let’s stay together: is low rent better than no rent?

In the first of a three-part series on asset management, Modus takes a look at the retail sector and how the landlord tenant dynamic changed during the pandemic.


  • Stuart Watson

06 July 2021

Purple toned American high street with sunrise illustrated sky

In the wake of COVID-19, many owners of retail property and their advisors are urgently seeking an answer to the most fundamental asset management question of all: how to turn an empty space into an income-generating one.

“The pandemic has accelerated decisions and forced a change in approach,” says Tina Reuter MRICS, head of EMEA asset services at Cushman & Wakefield. “How many tenants may never open again? How much of a challenge will it be to fill space in the traditional way? In the past you may have been able to put off making that decision, but now you really have to take action to reassess the risk and the potential of buildings and property portfolios.”

Most experts in the sector concur that the new paradigm for retail will see a much sharper focus on customer experience as a means of tempting online shoppers back to physical retail. “It is a question of finding the right mix to create that experience, while also looking at the resilience of your asset and making sure you are getting paid for the space. That has been a difficult balance for managers to achieve,” says Alexandra Faciu MRICS, a Canada-based real estate executive experienced in asset management.

“Shopping centre management may need to gravitate toward uses that increase footfall and keep those malls relevant. You are stemming the bleeding in the short term, not to survive, but to prosper in the future,” advises Chris Gardener MRICS, head of European real estate investment at CBRE. “Installing a climbing wall, for example, is an expensive piece of capital expenditure, and managers will face difficult decisions, but you have to give people a better reason to be there.”

31 per cent

The UK, Germany, France, Spain, Italy, and the Netherlands spent €325bn online in 2020, a 31% year-on-year rise

With some tweaks to their mix, regionally dominant centres can still trade well, he suggests. Building other uses on excess car parking can also boost visitor numbers. “If you have created an office building or a residential tower you have also created more relevance for your shopping centre.”

The upper floors of shopping centres and of large department stores are unlikely to have a future as retail and, in prosperous city centre locations at least, are ripe for conversion, says Josip Kardun, chief investment officer at private equity investor MARK. “For years we defended vertical retail. But sometimes, in a charismatic building, it is better to put in really good office, coworking or co-living components on the third floor.”

Struggling out of town retail parks are also ripe for repositioning, especially those close to large cities, where the demand for urban logistics facilities to dispatch ecommerce deliveries has rocketed. “Investors are amassing portfolios with that sort of potential. They are hedging their bets against what the future of retail might be. In five years they could be retail parks that still perform okay, or complete redevelopments, but most will be a bit of both with some retail and a logistics unit or two that may or may not serve the on-site retail,” says Gardener.

Coronavirus has forced many retail landlords to get to know their tenants better, as they seek to understand how much rent they can afford to pay during periods of restricted trading without endangering their viability. “We saw that landlords who did not have good relationships with their tenants did not do well in the pandemic, because the tenants went bankrupt, or moved somewhere else,” says Faciu.

Closer co-operation between landlord and tenant will continue, and will become an increasingly vital component of successful asset management in retail, as well as other sectors, argues Reuter. “That relationship is more important because they need to work together to manage and operate properties as occupier needs evolve in this rapidly-changing environment.”

True partnership involves a more equitable distribution of risk between landlord and tenant, and that has been reflected in the methods used to determine rents. In some European markets, where retailers have previously largely paid fixed-rate market rents, rates based at least partly on occupier turnover, and therefore more reflective of their business performance, have become increasingly commonplace. And in countries like Canada, which have a hybrid model already, the balance between the two elements has shifted, notes Faciu.

“When you have a high base rent and lower turnover, you know that the tenants are more solid and willing to commit,” she says. “But when the market is tentative, that base rent could be too high for them so we see renegotiations to increase the turnover element. That is a good barometer for where the market is at the moment.”

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44 per cent

of consumers have started buying products online they had previously bought in-store

Filling in the gaps

Making the most of shopping malls. Read more

Retail icons illustrated by Raymond Biesinger

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