The leasing structures we have in place today are based on a piece of legislation – the Landlord and Tenant act – that was passed over 65 years ago, in 1954. These rules were established against a backdrop that looked very different to society today – Winston Churchill was Prime Minister, it was 40 years before the internet, and even the UK’s first commercial television.
Yet, while things have moved on in many ways since 1954, our leasing model remains stuck in the past. The traditional approach of basing rents on historical market evidence rather than long-term affordability has created tension between property owners and retailers at a time when partnership and collaboration is needed more than ever. The current dependency on ERV-based valuation models also incentivises landlords to chase the highest rent payer for every unit, rather than focusing on the overall vibrancy and brand mix of a particular destination – which over the long term would deliver much greater value.
For both landlords and tenants to thrive again, the time has come to create an approach that truly reflects the role that modern stores play in an omnichannel world.
As such, Hammerson are introducing a new leasing approach in the UK, shaped by conversations with brand partners, our experiences in continental Europe where indexation is common, and the success of premium outlets, where a performance top-up is often included in leases.
Our approach centres on four key elements. Firstly, we will introduce flexible leases, with more regular breaks for both tenant and landlord. Secondly, we will work to rebase rents to an affordable level and replace the current rent-review system with one that links to an index, to provide certainty and reflect the broader economy. Finally, we will include a top-up element based on store performance, using appropriate omnichannel metrics – this could be the click & collect performance of a store, or footfall-derived for occupiers primarily using physical space for showrooming and brand interaction.
There are a number of cases where increased flexibility is already benefiting our tenants and our destinations. For example, this year we signed Brown Thomas, Ireland’s premium department store and part of the Selfridges Group, to take space in the repurposed House of Fraser unit in Dundrum Town Centre, Dublin.
The store will form part of the old House of Fraser unit and highlights the benefits of department store repurposing, alongside this new approach. The store itself will combine physical and digital to enhance the overall shopping experience. The lease includes a number of the elements above, including an index linked base rent, and significantly, a turnover top-up based on omnichannel sales.
While we don’t have all the answers today, we are confident that this is the right approach. In collaboration with our retail partners, we are trialling this new leasing concept at our Union Square centre in Aberdeen, and we anticipate rolling out the final model in 2021.
The current rental system was put into place over 65 years ago, for a market that is entirely unrecognisable today. It is clear that the time for change is now.