Matt Slade, Retail Director of Quintain, discusses how the Covid-19 challenges have encouraged landlords and their retail and leisure tenants to consider enhanced leasing models.
Question: How many articles have you read on CoStar over the past month or so about another retail landlord considering turnover-based rents? You might be forgiven for thinking these leases are the new big thing, filling the gap at a time that the Landlord and Tenant Act is struggling to keep pace in a rapidly changing world.
Quintain has employed turnover-based rents since London Designer Outlet, the capital’s leading fashion and lifestyle outlet centre, opened almost seven years ago at the 8,500 home Wembley Park development. This leasing model has worked so well, that we have adopted it across the retail and leisure lettings at our multi-billion pound transformation of Wembley Park, London’s newest cultural neighbourhood.
In recent weeks, many in the retail and property sectors have looked at great detail into something that is already common practice for us. This includes major retailers saying they will only negotiate leases that have a turnover element; some of London’s landed estates proactively overturning a century or more of rental formats; and significant property players reassessing their established tenant relationships.
Indeed, recent research by Total Turnover Solutions, a new asset management consultancy created by Realm, which manages London Designer Outlet for us, and Eccleston Capital, backed this. Its survey of 50 leading UK retail landlords, investors and financiers showed that 89% expect that the use of turnover leases will increase during the next two years. However, most of those surveyed (61%) are using turnover-orientated leases for less than a quarter of their assets.
So, to help those presently looking at turnover-based rents for the first time, let me share several years of knowledge and experience that has been built up by Quintain. From the outset with Wembley Park, we put emphasis on treating tenants as partners. After-all, they too have a big part to play in building an appealing destination and home for our thousands of residents. The success of the Wembley Park neighbourhood and its retail and leisure offering is a vital tool in attracting and retaining residents of Quintain Living, our Build to Rent management company.
Importantly, turnover-based rents are closely aligned to the performance of an individual store or restaurant. This creates a strong symbiotic partnership between landlord and tenant. In good times, both parties’ benefit; in less favourable times, both are incentivised to seek improvements - particularly if the happiness of residents in neighbouring Build to Rent developments is at stake.
The recent past will be memorable for the challenges created by the Covid-19 pandemic, including lockdown and footfall impacted by social distancing. It has put considerable pressure on landlord-tenant relationships, not least retailers and restaurateurs seeking to address the overheads of closed premises.
However, this is one of several reasons why turnover-based rents are view as a remedy for today’s circumstances. The model had inbuilt resilience in poor trading conditions – not that anyone could have envisaged the approach of Covid-19. It means that the financial burden on tenants is mitigated providing a clearer start for tenant liaison and negotiations. Compare and contrast with some other landlords that have had to consider litigation.
Put this all together, and the result is landlords and tenants striving towards common goals such as the overall appeal of a retail district by each tenant. Years ago, the consideration was merely a matter of calculating what rent a landlord could charge for a given unit and what yield could be realised. Increasingly, the focus is shifting towards more thought about the overall tenant mix. For example, the rent should reflect aspects such as the revenue potential of each retailer, their appeal in terms of the attracting customers to the wider destination, how they can bring extra value (and therefore revenue) to neighbouring retail tenants, plus how they add to the overall vision for the scheme, creating a memorable day out for all who visit and a much loved long-term home for all who live there.
The Covid-19 pandemic has created many challenges for the retail, leisure and property sectors, but also opportunities. By adopting pioneering leasing models such as turnover-based rents and through working with tenants to add value to the overall vision for a scheme, symbiotic landlord-tenant relationships can be created, benefiting all parties.
