Retailers urged to be wary of lease incentives

Retail landlords are offering generous incentives in a bid to attract new tenants, it’s been reported, but an expert says start-ups still need to do their research before signing a lease.

Stockland Group, which recently reported its half-year results, has increased incentives for incoming tenants to 7.2%, and 16% where the new retailer is replacing a business that has shut down.

According to Simon Fonteyn, founder and managing director of Leaseinfo.com.au, common incentives include a rent and/or outgoings-free period, a contribution to fit-out, and cash.

“Incentives are most commonly used when a shopping centre is new,” Fonteyn says.

“However, increasingly in the current difficult retail environment, incentives are being provided by landlords to new tenants, where a shop has been vacated by a  tenant due to receivership, or where an existing tenant leaves a centre.”

Fonteyn says new businesses need to be aware that incentives are often not registered on leases, and may involve confidentiality agreements and side deeds.

“It may be very difficult for a new business to find out what a market level of incentive is for a centre or new shop,” he says.

“New shops also need to be aware that incentives such as contributions to fit-out usually have conditions attached to them, such as claw-backs, where a tenant does not stay for the full length of the lease.”

The news comes amid increasing pressure for landlords to reduce rents, with major retailers threatening to close stores.

Major retail chains, including Myer and JB Hi-Fi, are seeking to exit underperforming stores, negotiate rent cuts or minimise annual rent increases to protect margins.

“We’ll obviously review every lease as it comes up,” JB Hi-Fi chief executive Terry Smart said this week.

But it seems landlords are already responding. Leaseinfo research found footwear retailers in NSW achieved average rent reductions of 3% over 2010-11. Fashion retailers in lower-grade malls also won rent cuts.

Leaseinfo found telcos, bank branches and food retailers generally paid higher rents on renewal, but expects these tenants to start pushing for rent reductions this year.

“The rent you pay and the lease terms you enter into can have a huge impact on your profit, and can be the difference between success and failure,” Fonteyn says.

“To successfully negotiate, market knowledge is power in this game. You need to be equipped with knowledge about the current retail rental market.”

Fonteyn identifies five key questions retailers need to ask landlords:

• What are similar businesses paying, and what are their lease agreement terms?
• What was the previous use for the shop?
• What are the demographics of the area?
• Is the centre subject to redevelopment or refurbishment?
• Who are the anchors of the centre and when do their leases expire?