Negotiating a lease….know your business
During the course of negotiating leases on behalf of my clients, I am often asked all manner of questions such as where is the best location for my business, what size premises are ideal, how much rent should I pay etc…?
I am always happy to provide recommendations about such matters, however it really is up to my clients to understand their own business model and have clear views on these types of issues.
Successful retailers usually have a very strong understanding of what works and what doesn’t work in terms of trade area, shop location, size of premises, orientation/shape of premises and acceptable gross rent. They are able to accurately assess a given trade area to determine how their product/service will be accepted and will often have a specific formula for determining how many transactions are likely to occur and the average sale per transaction.
Once a retailer has determined the level of annual sales that can be achieved, they will work backwards to calculate how much gross rent they can afford. This will be determined by the level of gross profit the business is likely to generate – a low gross profit business such as a newsagency can only sustain a low rent to turnover ratio of around 5-8%. Of course the inverse is true for a high gross profit business such as a jeweller, as they can sustain much higher rents.
It is not uncommon for successful retailers to own more than one retail business, so these operators are easily able to draw upon their experience and historical trading data to create a system that works for them. Over a period of time these owners develop an intimate understanding of all aspects of their business, so when it comes to negotiating a new lease, they intrinsically know their metrics and limitations. Being intimate with the metrics of your retail business is therefore imperative, otherwise you can fall into the trap of signing a new lease that just doesn’t work for you.
Over the past 5-10 years the retail sector has been under attack from a myriad of factors such as on-line retailing, increased competition from new players in the marketplace, low wages growth and high household debt. As a result, many retailers have fallen over which has resulted in increased shop vacancy rates, so landlords have struggled to grow rents and keep a lid on vacancy rates, especially in regional areas.
Of recent time I have noticed a trend emerging with many landlords pressing retailers to take on larger spaces, no doubt due to the difficult leasing market. On many occasions I have had to persuade landlords not to push my clients into taking unnecessary space, when they clearly have no need for it. Generally speaking the larger the space, the greater the rent (not to mention additional cost of fitting out and stocking these premises), so it’s not necessarily in your interest to take space in excess of your requirements.
Landlords often offer leasing incentives such as rent free and/or capital to encourage retailers to take more area, however this can be perilous. If the shop area is much larger than what you require, you are may end up paying a higher long term rent that is not sustainable, as well as possibly creating major stock issues, both of which can lead to severe financial distress.
If you are planning to enter into a new lease, I highly recommend that you thoroughly analyse your business, know your metrics and develop a clear set of leasing parameters and try not to deviate from them.