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Mall owners give retailers lifeline with sales-based rent offer

By Wainaina Wambu | Aug 13th 2020 | 5 min read
By Wainaina Wambu | August 13th 2020

Mall tenants could soon get some much-needed relief, with landlords said to be warming up to the idea of rent payments based on a business’ turnover as opposed to space occupied, as is the case currently.

This as the two parties seek ways to ride out the economic downturn occasioned by the coronavirus pandemic.

The retail space has emerged as one of the biggest casualties of the Covid-19 pandemic.

Head of Development Consulting and Research at HassConsult Sakina Hassanali told Home & Away that instead of rent discounts, landlords are keen on taking a percentage of turnover rent in the short-term.

“Absolutely, there are landlords who are willing to take a percentage of the turnover during this time as a way of sharing the risks with the tenants,” she said.

According to the Knight Frank head of retail Marc Du Toit, retailers have historically opposed turnover rent, ruling it out as an extortion method from landlords.

“Interestingly in East Africa, there’s historically been resistance from retailers for turnover rent simply because it’s been seen as an aspect of a landlord trying to maximise their returns and taking money out of retailers’ pockets,” he said.

“Now when things get bad, you have retailers running back to landlords asking them to move back to turnover rental,” he added.

A big contention in turnover rent has always been that landlords target high seasons like Christmas when retailers sell large volumes.

Du Toit was speaking at the virtual East Africa Property Investment Summit held last week and was part of a panel examining the current and future impact of Covid-19 on East Africa’s retail market.

The talk was moderated by the Retail Trade Association of Kenya Chief Executive Wambui Mbarire.

It also featured Naivas Chief Executive Willy Kimani and Sarit Centre Head of Development and Strategy Dhruv Shah.

Kimani reckoned that the regime of paying rent based on a square foot had created a lot of mistrust among retailers and landlords over the years.

He said earlier, lack of retail space had upped competition, and it became about how much per square foot one retailer was paying above the other.

“Things are changing and it’s actually the best way,” said Kimani. He said most retailers are now open to turnover rent.

Broll Property, in a 2018 report, noted that Kenya’s retail market was growing at a “lethargic rate” and projected the shift from rent charges based on space occupied to turnover.

“It is expected that landlords will continue to offer rent concessions with an anticipated shift from rent charges based on space occupied to either turnover rent or a combination of turnover rent and base rent,” said the Nairobi, Kenya Retail Snapshot report for the second half of 2018.

Du Toit pointed out that the most difficult aspect of turnover rent was how to determine it.

“You cannot manage what you can’t measure,” he said.

“Turnover clause is very simple. The landlord has viability that he has to see needs to see the return to be able to cover the loan for developing the property,” he added.

Du Toit said it is key for landlords to understand their tenants’ businesses.

“When a tenant gives the figures, landlords are able to project ahead and can even observe if their business is trading optimally or not,” he added.

This also helps landlords prepare to find alternative tenants instead of evicting non-performing retailers abruptly.

“No landlord wants a tenant to terminate because they’ve got a fixed loan... the industry on both sides needs to start working proactively,” said Du Toit.

The Broll Property report had also noted that after the collapse of the giant Nakumatt supermarket chain, most landlords had taken a cautionary approach by leasing smaller spaces to more than one anchor tenant.

Shah said Sarit Centre had moved to cushion the small retailers more instead of the anchor tenants, who weren’t many.

He observed that if the small retailers do not survive the pandemic, Sarit Centre mall would be left with six anchor tenants, putting its future at risk.

“Smaller tenants make up the heart and soul of any shopping mall,” said Shah.

Hassanali, meanwhile, noted that the entrant of new retailers had “excited” the market, but it is still difficult to say when the retail space would recover.

She, however, noted that if retailers’ operational costs were higher than income amid dwindling footfall to shopping centres, trouble lies ahead.

“We have an undersupply of good retailers. Hopefully, the new entrants will support the retail space,” said Hassanali.

“If their operational expenses are more than their incomes, it will move them into insolvency, which is difficult to come back from,” she added.

Du Toit noted that none of the malls in the region is doing well.

He added that the leisure side of the malls, which is a great driver of footfall into malls, has been greatly hit by the pandemic.

These include amusement parks, gaming arcades, bars, gyms and night clubs, which have remained shut.

“There are no new products, nothing to entice the customers,” he said.

Du Toit further observed that malls - whose selling point is a diverse tenant mix - had been impacted more by the virus than community neighbourhood convenience stores.

He, however, reckoned that throughout the pandemic, the landlord-tenant relationship had thawed as dictated by the tough times.

“It’s there for the good and the bad... a lot of goodwill has come from the formalised retail shopping centre where landlords have gone to retailers and said there’s a concern on sustainability, and let’s look for ways we can help,” he said.

“We are all going into business and investing capital to see a return, and we are all trying to maximise our returns, but at this point in time, we’ve all learnt to work together to maximise each other’s returns,” added Du Toit.

The panellists noted that in the pandemic period, items like electronics, casual and children’s clothing had witnessed a jump in sales.

They also noted that e-commerce has had the “best bounty” in the history of any business, but brick and mortar retail still hold sway.

“There’s always a transition in any business, and this has been given the best lifeline ever,” said Du Toit.

However, he pointed out that logistics for online delivery is still a great setback, including undependable postal systems.  

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