Making the case for turnover rents

COMMENT: If anything demonstrates how out of touch some commentators have become it is the notion that retailers have failed to adapt and that they should have seen this coming, writes Mark Burlton, managing director of Cross Border Retail. The retail and hospitality industries are the very essence of the word “adapt”, whether they are seasonal, cultural or, indeed, fashionable adaptations. The uncomfortable truth is that the changes they have made over the past five or 10 years do not involve many shops as they have become unaffordable. However, retail tenants do have a legal obligation to pay rent. It is after all what they signed up for. But what happens when the circumstances change to such a degree that a completely new form of relationship is the only way forward? One which will allow a fair rent to be paid and for assets to grow in value again. An excellent study by EG’s James Child concluded that 80% of UK retail real estate is owned directly or indirectly by the public. I don’t doubt it. However, I do question that fact being used as an excuse to go to the government for a temporary financial prop in the form of a Furloughed Space Grant Scheme without any other changes to the way we conduct business. If we, the public, own 80% of all shops then haven’t you, the owners, done a terrible job of looking after our money when some REITs are already devalued by 90-99% over book value? We aren’t really going to notice the difference if values fall any further as these “assets” are effectively impaired or written off anyway. I believe the government has made the right decision in barring aggressive landlord tactics for a period of time as it forces both landlord and tenant to work together towards a permanent resolution to a perpetual problem. Winding-up petitions or eviction notices are pointless anyway in a market where there are no replacement tenants. CVAs were just the start of the change and even the least palatable ones were approved by landlords that had no real alternative. The situation has worsened exponentially since then and if we revert to the old ways, even our best brands will fail in time. Turnover rents are the only option Turnover rents are the only option and I do not accept for one minute that they are impossible to value etc. The factory outlet business embraced them years ago and is poised to emerge from this crisis comparatively strongly as a result. Yields need to be adjusted and, most importantly, tenants need to declare their individual store turnovers, which they already know. Right now our government needs to focus on issues of far greater importance, such as health, education and transport, as well as winding down existing furloughs, not adding to them. It does not need to be distracted by an industry that is capable of dealing with so many of its own problems if only it would stop trying to point the finger and instead focus on a fair solution. A switch to audited turnover rents would also fix the business rates conundrum as rates can be pegged to annual turnovers that change in real time and respond to genuine market conditions. The government need only adjust the rate in the pound depending on its fiscal needs. New “showroom” use class While we’re at it, let’s change the use class order to define “showrooms” such as Nespresso, Apple etc. A showroom “class” would pay a turnover kicker to the landlord for the benefit of their physical space and as pretty much every retailer has an element of showrooming, this needs to be fairly reflected in rents paid. Conversely, brands with no e-commerce, such as Primark, might receive a preferential rate. Consensus is a far better route to a solution than blame. Neither landlord or tenant is at fault, but our landlord and tenant system is. We need to introduce pressure valves that allow for downward trends and a “three strikes and you’re out” policy or turnover ratchets would eliminate so called “lazy retailers”. This is what we should be asking our government to support, not a sticking plaster for gaping, ultimately terminal wounds. We need our youngest and brightest entrepreneurs to value physical retail again.