by Philip Lewis
In retail development, there is an erroneous belief that where North America leads, the UK will follow. Certainly, good ideas do emerge from across the Atlantic in this sector, but they succeed here only if they are used as bases for adaptation rather than conceptual prototypes.
There is still a considerable cultural divide between shoppers on the two sides of the ocean and any thought that it is possible to build a carbon copy of an American shopping centre in Darlington or Torquay is nonsensical.
We in Britain have to work around difficult physical constraints and restrictive local authority requirements. Developers are in a better position to build on greenfield sites in the United States, without the emotive backlash which occurs as a matter of routine over here.
But there is considerable scope for adopting some of the more innovative American ideas in the UK, allowing developers to increase their margins and, at the same time, permitting local authorities to incorporate new and exciting uses to the benefit of shoppers.
This is not an exercise in altruism. Clearly, good parking, easy access and greater all-round convenience will encourage shoppers to increase their length of stay.
Many of the headaches suffered by developers and local authorities could be eased by following the American pattern, albeit refining and blending the ingredients which are appropriate to the UK.
One of the more obvious “imports” from America is turnover rental and all that the idea entails. The fundamental difference between leasing retail properties in the USA and here in the UK is that the landlord’s income relates directly to sales in the shop.
Capital & Counties led the way with the introduction of turnover rents some years ago, and now a few other forward-thinking developers are following the example. In general, however, despite the massive retail development programme currently under way in this country, relatively few schemes are let on this basis.
In my experience the failure to introduce turnover leases usually stems from the reluctance of landlords to consider the concept — the very people in the position to reap the greatest potential benefit.
There are several reasons why turnover rents are popular in the USA and why — other than an overdose of caution — it is difficult to understand why they do not apply here.
First, turnover rents encourage active management of centres, and tenants are kept fully on their toes. It is also a simple matter to judge tenant performance, change the mix if necessary and gauge the success of the centre periodically.
There is the immediate benefit to be gained on improvements — on the reasonable assumption that refurbishments increase sales — and, finally, there is greater landlord/tenant cohesion than is apparent in this country. In the United States, the two parties constantly work together in promotional initiatives.
Here in the UK, most landlords seem to prefer a fixed rent with the usual five-yearly increases, giving them a certain return on capital employed. This, of course, may well be a symptom of the strong hold that the institutions have traditionally had on the property market and where greater risk is out of tune with investment criteria.
As to the advantages to the landlord of introducing turnover rents more widely in Britian, at least half a dozen spring readily to mind.
First, the landlord has the prospect of achieving growth at annual intervals rather than waiting for the five-year reviews prevalent in the terms of standard institutional leases.
Landlords can avoid losing out on rental growth in the interval between a prelet and the opening of a scheme. With turnover-related leases, this does not apply.
Information obtained on individual tenant turnover would help the landlord to manage more effectively . . . through a more thorough understanding of the retailer’s business and performance.
The landlord can readily monitor the impact of promotions and changes in trading hours or any physical improvements he may carry out to the scheme. He is never out of touch.
One of the knock-on benefits of turnover rents is the removal of the potential for conflict between landlord and tenant, particularly at review.
Even for totally committed advocates of turnover leases, of course, it is not all sweetness and light. One major snag is that the leasing arrangements usually provide for base rents as a percentage of rental value. Clearly, if this were not so, there would be a risk to the landlord if turnover did not come up to scratch.
Institutions may value only the base rates at a prime yield using a different multiplier on the higher risk turnover element which makes up the balance of income.
The result is a lower capital value than that produced by the traditional market rental basis and, therefore, an unattractive proposition for developers seeking funding.
A less tangible stumbling block is that some landlords are apprehensive of a system which puts them at a disadvantage vis-a-vis tenants who are in a better position to predict the potential volume of sales.
Conversely, there are many retailers who are adamant in their refusal to consider turnover-related leases. In my view their reluctance is ill-founded, borne of an unwillingness to recognise the value of joint landlord/tenant effort in promotional terms.
Departing from the turnover lease debate, and moving to refurbishment and remodelling in the context of fiscal viability, it is often hard to justify major schemes in the UK because landlords have to wait for an unacceptably long time for a worthwhile return on capital.
In the USA, shorter leases — perhaps for five to seven years — combined with annual increases from turnover leases, allow the owner to undertake improvements which are funded, to all intents and purposes, at once.
Pure finance apart, there is no doubt in my mind that in an increasingly competitive market-place it is necessary to consider uses complementary to retail activity in Britain’s emerging centres. The popularity of multi-screen cinemas which have followed the American pattern is just one example of a successful “ideas import”.
Food courts crossed the Atlantic, too, and, after a hesitant start, they are now working well in the UK. In my view, given an appropriate level of restraint relating to scale and style, many other facets of leisure will be increasingly important elements in shopping schemes over here.
Looking at other features which seem to work well in the United States while they are problematic here, I am struck by the American ability to make multi-level shopping work and the small differences in value that exist between floors.
In this country we have generally not been able to emulate the American preference for high value, high turnover trading at upper levels as well as on the ground floor. One of the best examples I have seen this year is Place Montreal Trust in Montreal.
Undoubtedly, there is an in-built — almost instinctive — resistance from professionals and retailers themselves, who see the ground floor as the principal trading level regardless of the strength of pedestrian flow or the configuration of a scheme.
But the scene is changing, albeit slowly. We are now developing centres with prime fashion trading on more than one floor. Brent Cross, where car-park access is equally good at each level, is the most obvious example of a success story in this context.
To sum up, I am firmly committed to the belief that what we really need to import from the USA is attitude rather than expertise. Certainly I envy their lack of inhibition that allows the creation of centres which turn shopping into a treat.
If we can loosen the shackles in our thinking then perhaps we will see turnover rents as the order of the day, with hotels, medical facilities, fitness centres and a host of leisure amenities drawing people into developments where shopping is synonymous with enjoyment.
Even in the States, it is not all plain sailing. There are many ideas and innovations which the Americans could borrow from Britain’s sophisticated shopping industry in a wider exchange of principles and ideas.