Is now the right time to sign up to a shopping centre lease?

By Sarah Stowe | 29 Oct 2015 View comments

Before you sign up to a shopping centre site there are some points to consider suggests Peter Buckingham.

I have been speaking with a few senior executives of some of our largest coffee and cake franchise chains over the last few weeks, and asked the open question: "How are you finding dealing with the big shopping centres at the moment?"

The common thread is that times are relatively tough, and so franchisors are having more success in negotiating new lease deals with lower rentals than probably ever before. The last thing a shopping centre needs is vacancies, and the queue of "Ma and Pa" individual businesses wanting a site has reduced greatly, so the need to fill the big shopping centres falls back onto the retail chains. 

If you want to secure a site, this puts you in a far better position than two years ago.

One retail chain told me how they had been prepared to walk away from some locations and actually had done so. Playing bluff with leasing agents really only works when you are prepared to close some stores, and actually do so and walk away.

Whilst the very big centres can handle this, and possibly find new tenants, the medium and smaller centres quickly start to take on a look of despair if there are more than a few vacancies on the floor.

In some states, where the law forces the registration of leases (New South Wales for example), it is possible to find out what the other tenants in the building are paying.

But don't be misled.

A registered lease indicates how much has been agreed upon in terms of monthly rental, but may not show the other items that have been negotiated. A shopping centre wants to maximise the amounts shown as lease/rental payments as these are reported in terms of returns to shareholders.

Other items that may be given away in exchange for signing the deal may be under marketing expenses, so not showing in the lease income for the centre.

Be aware that if you are agreeing to a monthly rental there may be other concessions on offer, such as rent free periods and fit out contributions, and be sure that you have your share. 

Of course one of the advantages of signing up to a new lease as a franchisee is that in many cases your franchisor will have negotiated a good deal with the landlord. But even if your franchisor helps source a location and conducts a lease negotiation, it is worthwhile understanding what you are looking for in a site rather than relying entirely on the franchisor. 

MEASURABLE DYNAMICS OF A SHOPPING CENTRE

So what are the main dynamics of a shopping centre that you should be looking for?

The first thing is the way of comparing one shopping centre to another. Whether you find information from the individual websites, from the property council data on shopping centres or the big guns themselves, you need to understand what they are telling you.

I believe the three most important numbers are:

  1. GLAR – Gross Leasable Area Retail – This is telling you how big the shopping centre is, and inevitably bigger shopping centres charge more rent per sq m than do smaller centres. A super regional centre ie Chadstone, Castle Hill and Bondi Junction, are all larger than 85,000 sq m, and must also have at least one major department store present.

     

  2. MAT – Moving Annual Turnover – This is what the shopping centre indicates is the total dollars per annum that is sold though all retailers in the centre. This figure is compiled from a combination of retailers who are required to submit their sales as part of their lease conditions, and those that have another arrangement. A super regional shopping centre will have an MAT of around $1billion annually.

     

  3. Pedestrian traffic – These numbers are the centre's submission of how many people come through the centre in a year. This is normally gathered from door counters, which have improved greatly in the last few years. 

You do need to be aware that the shopping centre may have another huge traffic flow that can distort the figures, but once you think about this, it can be easily addressed.

I recently did a site potential report for Melbourne Central and was amazed it had pedestrian figures of over 30 million. Why? It is above Melbourne Central Railway Station, and a huge number of people passing through are using the centre as a thoroughfare, going to work or university. 

Currently a strong super regional shopping centre will have pedestrian traffic of 15 to 20 million people.

WHAT YOU NEED TO KNOW ABOUT THE AREA

Once you have an understanding about the quantitative comparisons between shopping centres what else should you look at?

The first consideration is residential demographics, although in our view they do not play as significant a role as the physical attributes of the shopping centre. Demographics tell us about who lives and works in the specific area we are looking at. Census data gives a very good start and is readily available from www.abs.gov.au and by working your way through QuickStats.

You can also find out business demographics, or who works in and around the shopping centre you are interested in.

INTERNAL SHOPPING CENTRE ISSUES

We then must look within a shopping centre to find the best location for your store. 

The main issues are:

  • Suitable pedestrian traffic depending on whether your business is impulse or destination driven.
  • Precincts are areas of common business types, and you need to ensure you are in a suitable precinct for what you are selling. Obvious zones like food courts and fresh food areas are self-explanatory. 
  • Store suitability – making sure the store you lease meets the size you want. It's no good looking for an 80 sq m store for which your fit out is designed, and signing up to a  50 sq m, or 150 sq m because of the location!
  • Services – check your requirements. Again, there is no benefit if you need three phase power and 150 amps to then find you have 100 amps of single phase, and no way of installing exhausts, water or a grease trap if those are what your business requires. Make sure you know your exact minimal requirements.

If you are looking to invest in a franchise in a shopping centre, or to renegotiate your existing franchise lease, this is a good time to do it; shopping centre management are keen to keep the centres filled. Understanding what you are looking at in centre sites, demographics and location will help you make an objective decision.

Peter Buckingham is the managing director of Spectrum Analysis Australia, a geodemographic and sales prediction modelling company in Australia. Contact Peter at peterb@spectrumanalysis.com.au or www.spectrumanalysis.com.au.