What is the Market Rent of a Retail Unit?
Cara Reynoldson explores the reasons behind falling rents for retail units across UK and Europe
It is not uncommon for two similar units next to each other to have different Market Rents
There are a host of reasons why we are experiencing turmoil in the retail occupational sector.
If we look at it in its most simplistic form, rents are falling because there is falling demand for retail space and an increasing volume of redundant space -(JLL research indicates that by 2026 approximately 25 percent of the current retail space will no longer be needed).
Bricks and mortar are, by nature, slow to change in this evolving retail world and because of this, retailers have the upper hand, through CVA’s * or simple renegotiations.
They can negotiate, in some cases, unreasonable demands such as returns from online sales being deducted from turnover sales and in turn the turnover rent, which some retailers are reportedly requiring without any upside for the online sales being reflected.
This does seem unfair, but if landlords have no alternative offer for that unit then supply and demand dictates quite rightly that this is the market rent.
Supply and demand imbalance
Until this imbalance in supply and demand is rectified market rent will continue to be derived this way. However, the purpose of a retail store is becoming multi-faceted and we, as valuers, are attuned to the complexities of this.
A store is no longer just a point of sale but of equal importance is it providing a branding platform which has been proven to significantly impact on online sales in the surrounding area.
Recent CACI data shows that if there is no physical store in a catchment online sales fall by 50 percent. In addition, with many retailers commenting that the margin for online sales is slimmer than in store - in 2018 every pound of NEXT business that transferred from retail to online cost an additional 6p **, retail stores are being used as a distribution cost minimiser through click and collect and removing that expensive last mile of delivery.
In mainland Europe, Total Occupational Cost Ratios (TOCR) are used throughout and are reflective of the fact that different types of operators can afford different rents.
It is not uncommon for two similar units next to each other to have different market rents, enabling the landlord to make getting the right tenant mix their primary objective. In the UK, the market and in turn valuers, have already started to move their analysis from Zoning to TOCR’s, where the turnover data is available, but that only provides one element of the value of a store.
Market rent should be derived from considering the different uses of the store rather than just linking it to sales turnover (which is becoming the most common lease form at present).
To measure these new purposes for a store we should be looking at sales based on the point of fulfilment not the point of sale (such as online), reflecting the value of a multi-channel approach.
We should also be measuring the branding value of a store, which in the advertising sector is based on placing a value on the ‘impression’ of that location and then measuring the volume of ‘impressions’ that are made. This would be linked to footfall and would better align landlords and retailers’ objectives.
The need for greater information exchange between retailers and landlords
Until the supply/demand imbalance is rectified the true value of a store will not be recognised and the old way of establishing market rent will continue to be the norm. For the market, and in turn valuers, to be able to assess market rent in a way that fully reflects the true value of a store, far greater information needs to be shared between retailers and landlords. The sharing of this data would help to align landlords and retailers’ objectives and incentivise landlords to drive the performance of their properties to the advantage of all.
- * A CVA (Company Voluntary Arrangement) is where an insolvency procedure allows a company with debt problems or that is insolvent, to reach a voluntary agreement with its business creditors regarding repayment of all, or part of its corporate debts over an agreed period of time
- ** Source: https://www.sharesmagazine.co.uk/news/market/6355566/NEXT-PLC-Results-for-the-Year-Ending-January-2019