When Hammerson PLC announced in August that it was introducing a new leasing approach in its home market of the U.K., it was an acknowledgment that retail landlords' days of sitting back and letting the rent roll in were over.
The retail real estate investment trust talked of ditching a leasing model that "remains stuck in the past" and embracing a new approach at a time when "partnership and collaboration is needed more than ever."
"The current rental system was put into place over 65 years ago, for a market that is entirely unrecognizable today,” it said. "It is clear that the time for change is now."
A key pillar of Hammerson's new approach is a "top-up element based on store performance," or in other words a turnover-based rent. For Hammerson and other landlords adopting the increasingly common model, a change to how their income is determined is just one of the obstacles they will have to overcome.
"Turnover leases are more time and labor intensive for landlords. That's why landlords traditionally haven't liked them," Pat Sutton, associate director, retail asset services at real estate services firm Cushman & Wakefield said in an interview.
"We're moving to a situation where there is greater communication between landlord and tenant than there has been historically," he added. "Landlords can't just sit back and collect rent."
The obvious challenge landlords face is ensuring that the turnover their rent or part of their rent is based on corresponds precisely with the turnover generated by the store they have leased. This has traditionally been a matter of trust that the periodic turnover data provided by the retailer to the landlord was accurate. But increasingly landlords are demanding daily access to data on a store's takings.
"Both landlord and retailer have got to go into this with complete transparency," said Dan Simms, co-head, U.K. retail agency, Colliers International. "And you can't get any more transparent than having point-of-sale exposure of data."
Still, in a world of omnichannel retailing where a store's turnover might not reflect its true value to the tenant as a click-and-collect destination or showroom, for example, landlords are becoming increasingly aware that the space they provide often boosts a retailer's income online.
"It's a fundamental issue really in terms of how you capture turnover for turnover leases, which hasn't really been cracked," said Sutton. "You'll see more attempts from landlords to try and get full disclosure of how a retailer's sales are generated through its omnichannel, in terms of the store's relationship with online. And landlords trying to capture an element of that value in the bricks and mortar, which even the likes of Amazon.com Inc. recognize by wanting to have a greater physical presence."
The ambiguity around what exactly constitutes turnover often extends to the leases themselves as the relative novelty of the model for many landlords and retailers throws up unexpected questions, said Sutton. "One of the issues with the drafting of turnover leases is that there have been very few common standards until relatively recently," he said.
As landlords and struggling retailers have rushed to agree to new terms, key details have often be overlooked. "It's amazing how frequently the tenant doesn't reach the threshold to pay turnover rent," said Sutton.
"Most people recognize that there's a need for greater standardization in terms of valuer treatment of turnover leases," he added. "Also greater standardization in terms of leasing models because some of the historic leases that we have are very poorly drafted and ambiguous."
The property arm of U.K. financial services giant Legal & General Group PLC, which owns billions of pounds worth of retail assets across the country, recently announced a complete overhaul of its retail and leisure leasing model that includes the offer of turnover-based rents. The company's "flexible partnerships model" is a move away from traditional long-term leases to a "fully flexible approach that brings optionality to occupiers," it said.
Denizer Ibrahum, head of retail and futuring at L&G, said the new approach requires a substantial commitment and change of mindset from the company. "We're investing our time, our resources to really rethink these assets across shopping centers, retail parks and also the consumer-facing environments across the platform," he said.
Ibrahum compares the shift to a librarian becoming an editor, with L&G believing the current retail climate requires it as a retail property owner to take much more "curatorial control of our audience, content and the experiences we curate within the environment."
"We will have much more of a role in the asset in terms of understanding how we drive audience engagement to our occupiers," he added.
Landlords hoping to maximize the potential return from their turnover-based leases will need to take a similarly proactive approach to managing their assets and tenants, said Cushman & Wakefield's Sutton. Deeper analysis of sales trends within a property or portfolio and a variety of performance metrics on the retailers occupying those properties is becoming essential, he said.
"You do have to spend more time, and we're having to spend a lot more time as a consultant, analyzing retail trends, knowing what the costs are, because we're dealing with situations where a landlord has got to contain costs. This is particularly important as we're seeing more requests for totally inclusive leases," which cover things like rent, rates, service charge and insurance, he said. "It's the way of the world, really."