Retailer should be locking in their leases for at least five to seven years to maximise flexibility and avoid high exposure to high occupancy costs, according to Jones Lang LaSalle.
According to JLL’s corporate solutions director Damien Hawcroft retailers who secure a lease of five to seven years will improve their leverage during lease negotiations.
Hawcroft said retailers can create leverage in the lease negotiation phase by using strategies such as timing in the lease renewal strategy appropriately, utilising multiple leases and opting for fixed reviews in a rising market or for market reviews in a falling market.
“This could have a 15% impact on neutral cost,” he added.
Hawcroft said given the high level of competition for a relatively scarce number of new sites and current market conditions, generally retailers are recommended to secure a site with a longer term lease according to market conditions in each state.
“However, retailers need to balance the desire to secure sites with the need for flexibility to allow them to shield from or take advantage of changing consumer sentiment. This can be achieved by negotiating contraction or expansion rights, break clauses, options, deferred rental reviews and collars or caps.
“Most retail markets except Adelaide are not conducive to planned rental change in 2006, particularly in Perth and SE Queensland,” he added.
According to JLL, until the end of 2008, retail lease negotiations will be tight in the Perth and South East Queensland markets. This alleviates only slightly for 2009 and 2010.
Meanwhile, market conditions will be best for renegotiation of leases in 2008/2009 in Canberra and Adelaide.
In Sydney and Melbourne, retailers are best advised to allow for lease renegotiations in 2009 and 2010.
“Retailers should not be complacent, but act now. In today’s market the lead time for site planning, acquisition and fit out is about 18 months.
“While real estate cycles remain longer than business cycles, the advent of longer lease terms with flexibility means retailers are better placed to take advantage of real estate cycles to reduce their occupancy costs,” Hawcroft said. “Also contributing to this are the more innovative patterns of options and rent review clauses that are now becoming available. The paper cites the example of a retailer leasing a 400 sqm at $1,000/sqm in a rising market.”
“If the retailer chose fixed annual reviews equal to inflation over annual market reviews in a rising market, over seven years the difference in is almost $600,000.” Hawcroft concluded.
JLL’s retail research director David Snoswell said finding the best sites and negotiating the right leases are critical to the growth of a retail business, and the majority of retailers are planning to expand over the next 12 months.
“Retailers remain buoyed by expectations of retail growth despite the recent rise in interest rates.
“Figures for the June quarter show solid tenant demand has provided steady rental growth in all regional, subregional and neighbourhood markets, and forecasts are for continued growth in the medium term. Net rental growth ranged from 0.8% to 1.5% over the June quarter, with the strongest growth recorded in the Perth regional centre market,” he added.
“However, retailers remain limited low vacancies and the ability to find appropriate sites. For example, food retailer Boost Juice has recently been quoted saying that the most frustrating thing about growing a business is finding the best sites, and this frustration is common throughout the retailing industry,” Snoswell said.
By Nelson Yap
