Turnover Rents are not just for Outlets

Article as Featured in Retail Destination Magazine.

8th July 2022.

Why do you think the turnover lease model has proved so successful for Realm?

The turnover lease on its own is not a magic solution to ensure all that use it will be successful. It is the way they are implemented and the way the model creates a closer and far more collaborative relationship between landlord and tenant that are keys to their positive impact. Turnover leases provide a bedrock of data to inform decisions and provide the scope for fine tuning and intervention so you can make the right calls and not just work on instinct or retail nous. For example, as an asset manager with retail in our DNA we can see very quickly if a brand partner is underperforming and help to take steps to improve performance. This might be adjusting store layout, benchmarking against average spend, conversion rates, local perception of value, response to marketing, adjacencies and optimum footprint. Brands can benefit from the leases by comparing their performance to centre-wide averages and category kpi’s. These leases facilitate a far more forensic approach to physical retailing and can, to a degree, de-risk expansions. If you know what is working, and what is not, you can deploy lots of continuous improvement. Similarly, as a landlord you can undertake targeted leasing and achieve a far deeper level of understanding of what makes a destinations’ shoppers dwell and spend. The turnover lease is the ultimate win:win for the cultural shift of mutual improvement they encourage — retailers love competition so there is no better way of optimising performance at store and landlord level simultaneously.

Given the model’s success in the outlet sector, why do you think it hasn’t been adopted more widely?

One of the biggest potential stumbling blocks has been the industry’s reluctance fully embrace a new way of leasing. There have been concerns over the skillset required to flex the benefits of these leases when operators have traditionally been hands-off and not wired-in to occupier performance. 

The flawed system of shopping centre valuation has also exposed the need for more reactive and data driven thinking. The sector has for a long time relied on the artifice of long leaseholds with department stores underpinning long term rental growth with upward only reviews. Cultural change is required – doesn’t it make so much more sense for shopping destinations to be run by retail experts, with retail-friendly leases rather than bricks and mortar property professionals of old? It is crucial to adapt right now. Some retailers have been sceptical about handing over their trading data. The key here is getting retailers and landlords to realise a flexible, collaborative arrangement can be mutually beneficial — the leases encourage closer relationships.

With such sensitive data being exchanged concerns over security are often cited as a potential issue. At Realm we use secure, independent, audited software. We ensure any data shared is protected, proving with the right amount of due diligence, security concerns can be easily overcome.

Can the model work outside the outlet sector?

Most definitely. The outlet market has proved uniquely resilient over recent years and an intrinsic part of the sector consistently outperforming traditional retail has been the use of turnover rents and the approach to commercial operations that accompanies them. On the continent the model is used far more widely and the scepticism that exists here in the UK is far less prevalent. Whilst the products in full price and outlet may be different the principles remain the same – to nurture occupier performance, make decisions in partnership with occupiers and manage assets in a far more responsive way — what is not to like about that?

What would be the implications for retail if the model was adopted more generally?

We should see a new sense of purpose and an acceptance that retail can never again be seen as a passive “build it and they will come” sector. It follows that the tools and skills needed for retail to flourish need to be appropriate and using legal frameworks that date back to 1954 just do not seem relevant or flexible enough. Shopping destinations need to be curated, have their dynamics closely monitored and flexed to help them become more compelling whilst still delivering income for investors.

Schemes need a more balanced view on valuations and turnover leases can still underpin five year business plans so income can be modelled prudently and accurately.

Retail performance can be influenced using these leases if and only if the correct set up is in place with a layer of commercial management interpreting sales figures and looking for easy wins to leverage conversion. This needs to happen every day, not just at an annual review with a cursory glance at turnover — these leases create vested interest.

Turnover leases can acknowledge that retail stores generate income in more ways than linear in person sales. The structure can set a base rent and agreed percentages for physical sales, click and collect fulfilment, even monetising sales from dark kitchens which the industry is currently struggling to adapt to.

In a world dominated by subscription services, pay as you go and simplifying historic processes with the application of data if the sector adopts the turnover model more widely it will remove barriers to entry for new brands to consider physical space. At Realm, we have already seen the benefits of this with many pop ups and temporary offerings becoming permanent, creating a more varied and enticing offer.

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