12 | October | 2020

“The good oil”, an old Australian expression that refers to the practice of giving reliable, sound and truthful advice on a given subject - I thought this was an appropriate name for my blog.

The following articles have been written by me and primarily relate to retail property leasing and more broadly the retail industry in Australia. They are designed to be interesting and to assist retailers, however from time to time I will also make comments and observations about economics, geopolitics and social affairs here in Australia and overseas that I believe have a bearing on the retail industry.

All articles that I write are my own personal views and whilst I take great care when researching all subject matter, anyone reading these articles should do their own research and should not rely on any views expressed in my blog. You should always do your own independent research to satisfy yourself before embarking on any business venture.

I hope you enjoy my blog, “The Good Oil”

Cheers
Michael

Don’t accept the Status Quo….

So here we are, approaching the end of 2020 and it seems like so much has changed since the beginning of the year. A global pandemic has gripped the world and we now have a new language that includes such terms as “social distancing”, “Covid-Safe” and “Contact Tracing”.

Aside from the very real health impacts of this emergency, the economic fallout from Covid-19 has been felt in every corner of the planet, in fact according to the World Bank, global GDP is expected to contract by 5.2% this year, with major industrialised economies such as the United States contracting by over 30% just in the second quarter alone. There is now little debate amongst leading experts that the economic downturn could well be as bad or even worse than the Great Depression.

Australia has managed to avoid a major loss of life so far, however the economic consequences are being felt, especially in the state of Victoria where the Stage 4 lockdown has decimated thousands of businesses and causing deep social unrest. At the time of writing this article there is a debate raging as to whether or not the Andrews government’s response to the Covid-19 emergency was well managed – irrespective of one’s views, the fact is the economic downturn in this state is probably going to be the most severe of all the federation and likely to contribute to the Australian recession lasting longer than initially thought.

Whilst most other states and territories are experiencing lower rates of Covid-19 infections and are not in a Stage 4 lockdown like Victoria, the national economy and more specifically the retail sector is still very sick (pardon the pun). Having visited a number of shopping centres and high streets in NSW recently, it is clearly evident that there are still many retailers not re-open with more and more shops becoming vacant every day.

It is true that some retail channels have actually benefited from the lockdowns ie. “stay at home retailers” such as hardware stores, building suppliers, landscape/gardeners, electrical/electronic homeware retailers and supermarkets have all experienced a significant lift in sales due to many people spending a lot more time at home. However department stores, apparel, footwear, restaurants, cafes, lottery agents and newsagents have all been detrimentally affected – whilst the “stay at home” retail sector is currently enjoying their time in the sun, it’s not likely that this trend will continue in the medium to long term. Eventually government subsidies such as JobKeeper and JobSeeker are going to be cut off, as will allowing employees to dip into their superannuation funds. These factors together with rising unemployment, stagnant wages growth, a slowing property market and banks tightening up on lending, is likely to result in less retail spending across all sectors as we enter 2021.

Landlords are feeling the pinch too, in fact several large Real Estate Investment Trust (REITs), particularly those with substantial shopping centre assets recently sustained massive hits to their balance sheets and profits in FY20. Some of these landlords are endeavouring to navigate their way through this situation with common sense and are genuinely trying to work with retailers, however some on the other hand are putting their heads in the sand. Over the past 6 months or so I have dealt with a multitude of different landlords in connection with Covid-19 rental assistance – fortunately we were able to work collaboratively with most landlords, however some continue to be belligerent and wish to continue on as if everything is just fine – they want to maintain the status quo and do not wish to adjust their expectations according to what is unfolding in the market. However this is not the time for accepting the status quo, not by any stretch.

Unfortunately, I am still seeing offers from landlords with all manner of unrealistic commercial terms that are just not reflective of current market conditions. I have noted below some of the common requests and also detailed how I think you should respond to each of them;

High Asking Rents: Some landlords are still seeking major increases in rent, however rents in general should at the very least be frozen, if not be going backwards (however this is dependant of course on the specifics of your individual circumstances). Generally speaking though, I would not be accepting large rent increases at this time.

Rent Reviews: Many landlords are still seeking annual increases of base rent of 5%, however this is way too high. I would try to negotiate 2% or 3%

Turnover Rent: Most large shopping centre landlords are still asking for Percentage Rent or Turnover Rent, however I’d try to push back on this or at the very least, reduce the percentage.

Bank Guarantees: I have noticed a real upsurge of landlords wanting 6 month bank guarantees, however this is overkill and ties up too much working capital. I suggest providing the equivalent of 2-3 months gross rent + GST only.

Personal Guarantees: Very few landlords will accept no personal guarantees, however this is something that you should talk to your solicitor about. If possible I’d try to push back on this.

Leasing Incentives: There is still a lingering perception from some landlords that they shouldn’t need to provide any leasing incentives (such as rent free and or capital) to sitting tenants who wish to renew their leases.The theory being the landlord has you on the hook as you have a business at risk, so they don’t need to incentivise you to stay. WRONG….in this market you should have other options, so I would endeavour to seek incentives when negotiating a new lease or renewal.

Rent Rebates: Very topical at present especially given the Covid-19 situation. Whilst the federal government and the states/territories did introduce mandatory rental assistance for retailers who sustained a specific decrease in sales in 2020 compared to 2019, the assistance while helpful was not all that meaningful. Irrespective of the level of impact you have sustained from Covid-19 there are other underlying economic issues that were occurring before Covi-19 and will continue after the pandemic finishes. If you are in financial strife, I would press your landlord for assistance and be persistent, don’t take no for an answer.

For the most part I believe the majority of landlords are trying to do the right thing and are willing to help their tenants, however there are some landlords that still haven’t woken up to the “new normal”. They maintain that everything is ok, the economy is bouncing back quickly, so they shouldn’t be expected to suffer much if anything – they think everything is returning to the stauts quo. Unfortunately they are wrong, so don’t accept your landlord brushing you off in the current economic climate.