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Centres' clouded arithmetic

Posted On Thursday, 25 March 2004 02:00 Published by
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This is a complementary article to 'Old Mutual's smoke and mirrors game'

It is not at the point where the whole balancing act of creating a feasible shopping centre is done that the rent differential between anchors and line shops is the greatest. At this point everyone is happy and parties willingly contract with each other to get the centre going. It is down the line, when a centre is successful that the biggest rent gap occurs.

So says Pick ‘n Pay property director Izak Joubert, who points out that an independent paying R500 per metre in a successful 10-year-old centre has nothing to do with subsidising nationals and everything to do with supply and demand and landlords pushing for ever higher returns.

“The supermarket signs the longest lease. That’s what the landlord and the investors want. It makes the investment secure. The supermarket may sign for 20 years while other tenants sign three to five year leases. It is when these leases expire and a centre is trading well that sometimes huge rent hikes take place. At development initiation a landlord may have been happy with an investment growing at 9%. Yet, when leases are renewed rentals are hiked way beyond the escalation rate applied to the expired leases. The result is an investment that grows way beyond original budgets. The supermarket is not the culprit in this,” Joubert says.

“We have hardly ever seen a development proposal where it is not the first priority to secure the supermarket anchor. This is the fundamental starting building block for most centres. The other nationals follow on this. The independents are the last building blocks. Many centres will fail to materialise if they do not secure a supermarket anchor.”

He says nobody can argue that different tenants and different size stores should not attract different rates per metre.

“You bank total rands, not rates per metre. In rand value supermarkets often pay the highest rental in a centre while creating by far more footfall than any other single tenant. They also occupy large deep space that cannot be utilised for anything else or demand may not require additional meterage. It is too simplistic to just look at rates per metre,” Joubert argues.

“There are two major reasons why it is fundamentally flawed to compare local supermarket rentals to Europe. Firstly, land is far more expensive in Europe than in SA. In the UK, the land aspect of a development could be as high as 40% of the development cost, whereas in SA it should be no more than 15%. It’s like arguing that a flat in central Cape Town should be the same in purchase parity terms as a flat in central Paris or London.”

“Secondly, and the most compelling reason for not being able to compare these two markets, is the profit structures of European supermarkets versus those of SA supermarkets. SA has one of the most competitive food markets in the world as far as margins are concerned.

Supermarkets in the UK net double that of supermarkets in SA. When one considers that their cost structures, including rental, are higher than in SA, it doesn’t take much to figure out how they make more money.”

“Pushing supermarket rentals up has nothing to do with trying to make life easier for small independent tenants. We very much doubt that in the past a landlord would have passed achieving higher rentals on supermarkets on to small tenants. As pointed out earlier, supermarket rentals have nothing to do with the rates that small tenants pay, down the line when a centre is successful and rentals are exorbitant. Certain events that have put landlords in the limelight recently seem to have made the supermarkets a convenient scapegoat,” Joubert says pointedly.

He notes, ironically, that a certain very successful centre is known to have close to the highest rentals achieved in any centre in the country. This centre doesn’t have a supermarket.

Joubert also counters that landlords try to pass on every single possible cost. If they can do this they take less risk directly onto themselves.” They may even take a different view on keeping costs down to what they would have had if all tenants paid gross rentals and they themselves took the risk of runaway operating costs. We would imagine that the more complex a centre is in terms of what it offers in terms of the catch phrase ‘shopper-tainment’, the more expensive they are to run. Centres that are built larger than market demands will surely also not help keep operating costs in check,” Joubert says.

Publisher: Cape Business News
Source: Cape Business News
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