Tenants’ tough fight against their Landlords
The landscape for retail has changed dramatically these few years as online e-commerce have become more accessible, due to the improvement in the retail supply chain and processes of online retailers.
Thus, more and more consumers are purchasing what they need online. This means that retailers need less space. For retailers that are primarily brick and mortar, they face a daunting prospect of having too short a time to ramp up their e-commerce strategy to compete.
Many retailers face the prospect of closing down, and for the anchor tenants, they are factoring E-Commerce into their overall strategy and thus need a smaller retail space.
All these spells trouble for the retail REITs. In Singapore, the retail REITs Suntec, SPH, Starhill Global REIT, Capitaland Mall, Frasers Centerpoint Trust and Mapletree Commercial are still surviving. (look up their dividend yields on my dividend stock tracker)
This week, I read this piece in the Australian Financial Review on how retail shops are negotiating with the landlords.
I feel its an interesting read for the REIT investors to ponder how some of these lease contract situations will play out.
Note that the context of this article is in Australia, and the REITs that is likely most affected are Starhill Global REIT. However, you could possibly ask these questions to your REIT management the next time you meet them.
If we look at the leases to anchor tenants in Starhill Global REIT and Australian Retail REITs, they tend to be longer than the Singapore counterpart, which are typically 3 years. They do have fixed rental escalations as well.
The article points out that:
- The Landlords have strong contract agreements that prevents them from backing out
- The contract agreements go so far as getting the tenants from bearing the cost of removing their fittings and keeping the space in a pristine condition
- For shops that are in distress, a normal rent to sales ratio becomes closer to 50%. As a comparison Capitaland Mall and Frasers Centrepoint Trust‘s rent to sales ratio should be below 20%. If your sales are reduced, the ratio jacks up
- It gets worse for these retailers as they have no way to pay 2%-5% annual rent escalations
- The interesting thing is that if the tenant is insolvent or in administration, lease liabilities are void. The tenant can walk away from the lease. This in my opinion is no different in some of the lease termination by Soilbuild Business REIT‘s tenants. The REIT can tap upon the rent deposits which the tenant cannot get back.
- However, the tenant might not be able to easily wriggle their way out as some of them still require the revenue (having revenue is better than not having any) and that they might not have the ability to pay the lease liabilities
- This might be similar to some business having more complex special purpose vehicle (SPV) structure to host specific business. This may be done for tax reasons but also to contain situations where they can walk away by closing down part of the business without affecting other parts
Some things to think about.