January 24, 2005

By Dirk De Vynck

Cape Town - The consumer spending spree of the past two years has not only been good for retailers, but also for the landlords of shopping centres, who have seen their turnover clauses kicking in and securing them extra income on top of the base rentals they charge.

Neil Schloss, sector head of retail property management at Investec Property Group, said that the landlords of shopping centres negotiated a base rental with tenants as well as a turnover clause - a percentage of sales - which kicked in if sales exceeded a certain level.

"Turnover clauses have secured the landlords of shopping centres a meaningful amount on top of the base rental they formally receive for at least the last two years, and this is at no additional cost to them," he said.

Schloss added that the growth in retailers' turnovers was in excess of the escalation rate on rentals, which for national retailers was around 7 percent to 8 percent.

The norm for national supermarkets' turnover clauses was between 1.5 percent and 2 percent of turnover, while national clothing retailers like Edgars, Foschini and Truworths normally had a rate of between 3.5 and 6 percent.

Restaurants' turnover clauses were normally closer to 10 percent, while the broader service industry did not have any turnover clauses in their contracts.

Schloss said the company seldom set turnover clauses higher than 10 percent, as it could be detrimental to the financial viability of the tenant.

A core aspect in determining the rate of the turnover clause was the profit margin at which each retailer traded.

That is why supermarkets, which traditionally have very low margins, had such low turnover clauses, and why clothing retailers that had higher margins had their turnover clauses set at superior rates.

Traditionally national retailers also paid a lower rate than comparable independent retailers. However, although most lease negotiations were done around the benchmark, different approaches could be followed.

For instance, Schloss said a tenant could opt for a lower base rate in return for a higher-than-normal turnover clause.

He added that there was always downward pressure on turnover clauses from tenants, more so in good times when the clauses kicked in. This was because the turnover payable according to the turnover clause was an extra cost on top of the base rental.

Property economist Francois Viruly said retailers were always out to improve their trading densities, which of course was good for landlords' turnover clauses.

Angelique de Rauville, chief executive of property asset management company Provest, said the buoyant performance in the retail market would transpire into listed property, where funds that had exposure to quality retail properties were expected to outperform the market.

These included Grayprop, Sycom and Hyprop, which she projected to show earnings growth in excess of the broader sector's forecast of 4 percent to 6 percent.