If retailers want leases that reflect modern shopping habits, should they hand over a cut of online sales to their landlords?
Some property owners think this would be a fair trade off in the clamor for more flexible rent arrangements. So far, though, there is no good way to measure what landlords might be entitled to and tenants have few reasons to play ball.
From global fashion players like Zara and H&M to mom-and-pop stores, most retailers are demanding better terms from landlords as the Covid-19 pandemic slows sales, particularly offline. In the U.K., shop owners received only two-thirds of the quarterly rent they were owed in the three months to Sept. 22, according to data by Remit Consulting. More tenants now want to hand over a percentage of their sales as rent rather than a fixed monthly or quarterly fee, an arrangement already common in the U.S.
Whatever the lease structure, commercial landlords are increasingly exposed to fluctuations in their tenants’ day-to-day business. That is a problem for valuations, among other things. “How do you value your assets if they are based on turnover that is constantly going up and down,” said Tom Whittington of global real-estate agent Savills.
Uncertainty about future cash flows and how to service heavy borrowings has weighed heavily on the share prices of big European retail landlords such as Unibail-Rodamco-Westfield and Hammerson. Having fallen around 80% since the start of the year, their stocks now trade at a fraction of net asset value, reflecting investor concerns about equity raises as well as where rents and valuations will settle.
To offset some of the new risks, landlords are looking at whether they can include a portion of a retailer’s digital sales in the pot of revenue that is used to calculate the rent. Hammerson, for example, will let U.K. tenants switch to turnover-based leases, provided they pay an “omnichannel topup.”
Retailers, which are already paying rent on e-commerce warehouses and often don’t make strong margins on online sales, will be understandably reluctant to hand over a cut. But there is some evidence that physical stores drive digital purchases. Opening a new shop in an area increases traffic to the retailer’s website by 37%, according to a study by the International Council of Shopping Centres.
Even retailers admit as much with omnichannel strategies that try to break down barriers between store and online purchases. For example, brands increasingly use their shops to take in returns of goods purchased online or to let customers pick up web purchases—so-called click and collect—saving on delivery and collection costs.
Measuring a shop’s halo effect on the online business is the difficult bit. Some landlords are looking at whether they can claim a cut of the e-commerce business done in a store’s catchment area. Hammerson plans to use metrics like a store’s click-and-collect activity to calculate its cut.
However things turn out, new lease arrangements will require retailers to open their books to landlords in a way they aren’t used to, and to explain how the online and store-based sides of their business interact. Rather than passively collecting rent, property owners will more than ever be partners in their tenants’ business. Negotiations between the two sides aren’t going to get easier any time soon.