Tue 02 Feb 2016

Understanding the contents of the retailer clients' basket

A recent British Council of Shopping Centres paper "Outlook for retail: 2016" reported that according to research from Jones Lang LaSalle, they estimate that around 50% of retail leases are due to expire by 2017-  2018, which they say "arguably leaves the industry on a cliff edge."

If that statistic is correct, and applies in Scotland as it does south of the border, it does open up the possibility of an enormous change in the retail sector within the next 5 years. Whilst we see new entrants to the market all the time, we are also seeing large scale re-purposing of existing retail units, whether it be within the DIY and Gardening sector or the Groceries sector,   as well as more consumer spending opportunity in the high street on luxuries, such as a trip to the cinema or dinner in a new fashionable restaurant.

We all know the challenges for retailers: continuous changes in business models, with digital and online technologies; complex macro economic issues ranging from global consumer challenges to the particular UK issues: our commitment to the National Living Wage and the impending UK referendum.

We also know the key property costs  - rents, rates and maintenance and repair, all of which need to be sensibly addressed in letting agreements - are a big cost to retailers.  The recent spate of cases over dilapidations is a reminder of the importance of the wording of the letting document itself, and gave a salutary warning not to rely on the courts to apply commercial common sense to dilapidation resolutions, where the parties have clearly agreed a course of action at the outset. If indeed we see a large number of lease expiries in 2017 - 2018, we can expect to see a lot of focus on terminal obligations, if retailers decide to move on, or close down.

But within the retail sector itself, different segments of the market face different challenges and require different solutions.

As a team at Morton Fraser we get that.  The grocery sector, where we represent market leaders, still has tight growth predictions, and as a result, the trend towards repurposing continues. The convenience market remains highly competitive, whilst the fashion sector is very much divided between the needs of the luxury brands, as opposed to those of the volume retailers. Lease agreements need to take account of the nuances of omni channel retailing, but often ones we see don't. Industry knowledge is key to understanding retailers' needs. It's not just about legal issues such as repairing covenants, alienation, insured risk damage or even rent review.

One interesting example is pharmacies.  Their operational needs are different to the retail sector generally if they have dispensing facilities. There are also benefits to them in securing and being able to retain premises near the local GP practice. Their driver is dictated by the key function they perform - but of course, there is virtually no statutory protection for tenants in Scottish commercial leases on the one hand, whilst regulatory controls mean rent reviews and valuation criteria applied are by necessity bespoke for the sector. It is also a sector where on line penetration remains low compared with other sectors, but this may change.

At the luxury brand end of the market, less is more in relation to, for example, window coverage. Turnover rents remain popular, but must take cognisance of the multi channel perspective.

So when considering options for retail premises, ensure you seek advice from people that not only operate in the retail sector as a whole, but also understand your particular business challenges.  If the BCSC statistics do hold true, there will be lots of decisions to be made within the next 5 years - make sure that you have the best team to help you through this process.

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