Retail leases in Australia are commonly indexed to CPI on annual basis, sometimes even CPI plus a fixed percentage – I recently heard from a client that Westfield are now spruiking +2.5%!!
So the effect of this for a retailer is that Base Rent, Promotions Levies and sometimes even Outgoings (CAMS) will escalate each year regardless of performance. Take out a seven lease at 5% stepped increase and that’s 34% plus increase total – and its not like there was a discount upfront.
The significant majority of Australian Prime, A Grade and even B Grade retail space is owned through large investment funds and managed or owned by major landlords such as Westfield, GPT/Lend Lease and Colonial.
As blue-chip investment grade vehicles there is a need to ensure income from these funds grows so that investors in the funds achieve the kind of returns they expect. The CPI benchmark becomes a minimum for the fund such that the above this threshold ‘real’ returns are delivered – better than the increase in the cost of money.
The linking of CPI to retail rents is particularly flawed for the retailer as an increase in prices (wholesale and retail) most often has an inverse relationship with the performance on the shop floor – it costs more to buy and more to sell so while GP erodes consumer demand slows also because it costs more. So a larger increase in occupancy cost is basically a triple whammy for a retail business.
So with each week seemingly forcing another retailer into administration it should be frankly terrifying that today the retiring Reserve Bank board member Mr Graham Kraehe has highlighted inflation as “more of an issue”, suggesting that the introduction of the Federal Government’s Carbon Tax was “almost certainly understated”.
With the Government’s current estimates to be 0.9% then could we see an impact of 1.5% or 2.0%, on top of the board’s 24 month predicted limit of 3.0%?
What would the impact of 4.5% be on every CPI indexed retail lease in Australia? With retail sales flat and external influences on revenue like online sales and on costs, such as flexible IR regulations, we are seeing a nightmare scenario for retailers. But Wayne Swan tells retailers at COSBOA that its their fault and the Carbon Tax will be good for them.
What can you do about your Australian retail leases?
- Don’t accept CPI as the benchmark for rental increases – there is no law to say you can’t
- Renegotiate with your landlord – its that or a vacancy and release scenario
- If you do have a CPI indexed review always make sure the right Index is used
