Landlords are a much-maligned breed, exemplified by Alexei Sayle’s Harry the Bastard in The Young Ones, who would regularly pop up to put his jackboot through his tenants’ TV, proclaiming, "That’s £700 you owe me!" But the tables are being turned on the Harrys of commercial property, who have grown accustomed to dictating terms and demanding rent increases.
The commercial retail rental property market is in freefall. It is forecast to decline by 15.7% in 2009 and a further 13.4% in 2010 (source: DTZ Research). The vacancy rate for retail premises is mixed across the country, but Experian published a report in February estimating the UK shop vacancy rate at the end of February 2009 to be 10%. This was predicted to grow to 15% by the end of 2009.
While some retailers will be hit by declining footfall, does the predicted one-in-six vacancy rate present an opportunity for expanding or renegotiating existing leases? High rents were third on the list of coffee shop executives’ top 10 challenges facing the market, following the economic downturn and consumer spending (Allegra Strategies’ survey, May 2009). Still, big chains like Starbucks are beginning to see some slack from landlords. "There’s a lag effect [in recession] and property is typically the last one to catch up," says Starbucks UK and Ireland MD Darcy Willson-Rymer. "I think the property market is responding and we are seeing a lot more flexibility. What the landlord wants is security of tenure, a long lease and a good covenant."
Paul May, MD of Druckers/Patisserie Valerie agrees that a strong brand will attract better rates. "Most people like our brand and that helps with negotiations," he says. "Our personal rent levels - what we’re prepared to pay - have fallen by about 30%."
Meanwhile, 14-shop Wenzel’s the Bakers is being attracted into premium London high street and train station locations by six- to nine-month rent-free periods and crashing rates - in one instance, dropping from £80,000 to £49,000. "Before, you were having to pay premiums for good locations," says Sarah Wenzel, whose business owns the freehold on many of its sites, making it cash-rich to expand. "Having rent-free periods helps us with the cost of shop-fitting."
There are also opportunities off the beaten track, says Igor Bekaert of eight-shop Belgique, which plans to grow to 25 outlets around Essex and London in three years, usually at the end of high streets. Landlords now offer Bekaert nine-month rent-free periods, especially as he’s willing to sign 15-year leases. "We now ask for 20-25% below asking price - we wouldn’t have done that in the beginning," he says. "They see that we improve the building and their investment, and the value goes up, not only on the shop but on their whole parade. I have a principle whereby I won’t pay more than £25 per sq ft and the agents know that where the landlord is asking maybe £27, they can convince them to lower it once they’ve seen one of our shops."
While strong covenants may suit the bigger chains, there are ways for smaller operators to negotiate. Tom Herbert, director of Bristol-based Hobbs House Bakery, negotiated a two-month rent-free period on his new shop. He also got a stepped agreement, whereby they pay a little more each year. "I did push for more and wonder whether I could have got it, but I so wanted the location that I didn’t push it any further!" he says. "I’ve heard of businesses in Bath being offered rent-free for a year - for the right brand."
But there is a mixed picture across the UK. Druckers’ Paul May says rent drops have yet to emerge in premium areas. "I was rubbing my hands 12 months ago," he says. "I’d hoped we’d see a lot of properties coming on the marketplace, but in the good areas where we want to be, we haven’t seen the rent drops - especially in London. However, we have found some really good results in Bristol, Oxford and Kingston upon Thames. In shopping centres there are huge incentives, particularly new shopping centres, though we’re not looking to go there."
Even with high vacancy rates in towns, local rents have not always dropped. Dawn Van Rensburg of Gerrards in Wrexham, says that, despite big gaps on the high street, "there’s not much being done by the landlords to recompense that; we’re not seeing any give or take."
Widespread rent problem
So how widespread is the problem of landlords refusing to drop rents? "Unfortunately too widespread," comments Barry Lewis, senior partner at accountant Harris Lipman. "There is a huge reluctance by landlords to reduce rents, because what they don’t want to do is create a precedent in a row of shops. Once one tenant is heard to say they have had their rent reduced by 20%, it travels like wildfire.But while landlords are taking this hard line, they could actually be worse off if businesses shut down. To find another tenant is not so easy, especially in small operator shops."
How, then, can retailers best convince landlords to rethink? "If you’re renegotiating an existing lease and your business is viable, you’re stuffed," says Henry Ejdelbaum, MD of accountant AIMS Partnership. "If your business struggles, you have a better chance, because the landlord does not want an empty shop." This is because landlords now have to pay full rates for empty properties; previously they paid 50%.
"There is no rule of thumb as far as incentives go and it is down to individual negotiations depending on location and length of lease - the longer the term, the better incentives the landlord is likely to offer, though this is of course a double-edged sword for the tenant," adds Nick Walton of property services provider DTZ, which advises the British Shops and Stores Association.
So while the day has not yet arrived where you can, metaphorically speaking, put your boot through Harry’s TV, there are deals to be had, and they are only going to get better as the recession bites.
=== The art of negotiation ===
l Be transparent and don’t bluff with your landlord. Have a clear, realistic strategy of what you want to achieve before making contact.
l Always go armed with numbers: if turnover is down, compare takings from a year or two ago with the last six months.
l The landlord would be worse off with an empty unit than with a tenant, as new tenants are harder to come by; they would have rent arrears, no rent coming in, would have to pay 100% rates, insurance, security and maintenance.
l Offer a win-win: negotiate a deferment of rent on your existing property rather than a rent reduction. If you have a five-year lease, ask to defer for 18 months, by which time an economic recovery should be under way. For example, if you are paying £50,000 and you offer to pay £30,000, you would begin repaying the outstanding £20,000 in 18 months’ time over the remainder of the lease.
l Do your homework. The demand of an area and footfall defines rental value, so don’t expect massive freebies on Oxford Street in London!
l If there is high demand in an area, your negotiating powers are less. According to Experian, Holyhead and Milford Haven in Wales have the highest number of empty shops at 39%, followed by Beckton (Greater London) at 37% and Chelmsley Wood (West Midlands) at 36%.
l Agents may, pro rata, get you a better deal. Hypothetically, if you have a local agent who is prepared to work for £1,500 and gets the rent down £1,250, you have a big saving over five years.
l Alternatively, going solo can pay off. Wenzel’s the Bakers checks local areas once a month for new vacancies and does its own negotiating, saving agency fees.