The following proposal was received recently by a member that is a tenant in the service sector of a sub-regional shopping centre. This centre has been in some decline for a number of years as the figures below will testify. The centre has recently seen a major tenant depart only to be replaced by a number of mini majors. It is currently anchored by a single discount department store and two supermarkets and contains approximately 100 specialty stores.
Shopping Centre News has reported that the MAT of the centre has declined from $173.2 million to $161.9 million in 2007. This equates to a 6.5 percent decrease in sales. The specialty shop sales per square metre had also fallen from $9,299 in 2006 to $8567 in 2007. This decline has been taking place over the last six years with the centre being impacted by the expansion of two regional centres that are on the northern and eastern boundaries of the catchment.
The member received a letter of offer for a new five year lease of $169,000 a year or $1890 a square metre with an annual increase of CPI plus two percent. Operating expenses on top of the rent were $200 a square metre. The marketing fund was to be four percent of the base rent. In total, the occupancy cost came to $193,708. This represented a 36 percent increase over the current occupancy cost.
How can a fund manager justify a 36 percent increase in a centre that reports an 8.5 percent decrease in performance?
What justification can a fund manager use for a 36 percent increase in rent in a centre where Shopping Centre News reported an 8.5 percent decrease in specialty shop performance over the past twelve months? All reports indicate that this position of decline will not turn around even in the medium term. What was even more concerning in the letter of offer was the misuse of the Urbis JHD Retail Averages. The sales per square metre figures that were in the letter of offer used fast food sales and specialty food comparisons and these bear no relationship to this particular tenant.
Comparisons
If one is to look at the adjacent rents for similar sized shops they are $119,822 for 130 square metres or $921 a square metre and $120,000 for 100 square metres or $1200 a square metre.
Answer
The answer perhaps lies in the fact that the property trust collects the sales figures of the tenant who is currently on an occupancy cost of 12.6 percent and it has seen the opportunity to take the tenant closer to his break even point with an occupancy cost of 17.2 percent. The member has been a tenant in the centre for 15 years. Because this member operates in the service sector, there is significant good will tied up in the business and his business is the primary means of supporting his family. This is capturing good will by stealth as there is absolutely no security of tenure on an equitable basis.
There are many members in centres that are being confronted with such demands and experience is showing that with good advice these demands can be fought with success. Do not hesitate to contact the Association for advice on how to handle these demands especially if you are a sitting tenant facing a lease renewal.
