Progress on more turnover-based rents held back by trust issues - report

By

Nigel TAYLOR

Published
Oct 6, 2021

The increasing move towards turnover-based commercial property leases for retail has hit a stumbling block — trust.

Although this form of leasing is seen as better suited to the operational needs of UK retailers, especially since the pandemic hit physical retail, it's being held back by “trust issues” around data sharing between landlords and occupiers. 

That’s according to a new survey of retailers and food/beverage operators who occupy more than 11,000 stores across the UK.

Although there’s “overwhelming support” for a move to turnover-based leases, “there is an element of distrust on both sides around how revenue data should be shared and used - despite there already being a successful model for their operation in the outlet centre retail sector”, according to the report by specialist asset manager Total Turnover Solutions (TTS).

A number of big names have switched to turnover-based rent deals following company voluntary arrangements in the past couple of years, but other — healthier — retailers are also looking towards turnover as the main criteria for setting rents. It comes after many years in which property values were rising and rental agreements allowed for upwards-only rent reviews. With many retail stores becoming less valuable due to the online boom and the pandemic, this has caused problems for retailers.

In its survey, 80% of respondents, supported a move to a revenue-responsive approach to leasing. Only 8% said turnover rents were unsuitable for their business, although most of these were showroom-based operations.

The report highlighted also “highly successful" outlet centres, such as the London Designer Outlet at Wembley and Bicester Shopping Village. These have had turnover leases as the norm for many years, but it said “they require precise data collection and analysis which, in turn, shapes the active management of centres”.

But the majority of brands and operators that want to move to turnover leases said they would only be willing to supply revenue data to landlords if the process was “secure, easy to use and their businesses could benefit from aggregated data perspectives about locations and be able to apply that intelligence to inform their future trading projections and performance measurement”.

TTS co-founder Mark Phillipson said: “For occupiers, turnover leases help de-risk their property liabilities and for landlords, they provide stable income in the form of the base rent with an additional revenue-responsive income stream which they can help boost through active asset management. 

“However, some landlords are concerned that occupiers may misrepresent turnover levels for their own advantage while some occupiers feel that turnover data may be used against them in some way. These ‘trusts issues’ around turnover leases must be addressed at once if we are to successfully rebuild the UK retail and leisure sectors after the trading damage done by the pandemic.”

The report also highlighted that, at present, the majority of landlords do not have the data infrastructure or asset management expertise to accommodate a switch to truly pro-active turnover-based leasing.