Retailers free to choose non-Reit landlords

[SINGAPORE] Retailers do have the freedom of contract to choose which type of landlord to lease space from, be it shopping malls owned by real estate investment trusts (Reits), developers, property funds, or small-time owners of strata unit stores, industry watchers say.

This freedom weakens the validity of their grouses that Reit-owned malls are imposing too-steep rental increments and injecting too many unfair terms into lease agreements. They have the option of renting from another mall owner with less onerous terms.

That said, their options may soon narrow in future, as other categories of landlords begin to adopt the business practices used by Reits and some property funds. At the same time, the choice of available landlords is also shrinking as more malls previously in the hands of other landlords now come under the control of Reits.

One main gripe retailers have is the harsh terms and conditions included in lease agreements, such as having to pay a significant chunk of their turnover (25 per cent, for instance, is deemed insurvivable for business) together with the base rent.

Other such terms include possible eviction if a minimum sales target is not met, short notice needed to be given for tenants to vacate a space, as well as the landlord not having to compensate the tenant if he decides to redevelop the building and relocate the latter.

"Every lease agreement has some of these things," noted Douglas Benjamin, chief operating officer of FJ Benjamin Holdings, an international luxury and lifestyle brand retailer.

But while these sorts of contractual terms are deemed unfair to retailers, they are not regarded as anti-competitive, according to Burton Ong at the National University of Singapore law school. "They don't harm competition, they just make life very difficult for the tenants," he said.

There is not much relief for retailers looking to get out of these "harsh and one-sided" contracts, partially due to their insufficient bargaining power and simply put, because "they entered into these agreements eyes open", he added.

It is also unlikely that any legal avenue for smaller retailers seeking relief from onerous contracts will be set up any time soon, because it will appear inconsistent with the pro-business environment the Singapore government is trying to maintain, he said.

Associate Professor Ong thinks that the troubles plaguing retailers are an inevitable part of operating a business in a capitalistic market-based economy.

"Parties are expected to look after their own interests, even when up against another party with much stronger bargaining power. Freedom of contract means the tenant is free to choose if he wants to accept these terms or look elsewhere."

Retailers couldn't hide their turnover even if they wanted to. Some malls, especially those owned by major retail Reits, harness a point-of-sale system, where each time the cash register is rung up, sales data is captured and fed to the landlord's computer system.

Mr Benjamin concedes that Reits are just doing their job: "There's no need to vilify the Reits particularly, they're doing what they're mandated to do, which is to get the best returns for their shareholders, and every business has to do that."

To be sure, Reits are also finding it increasingly difficult to compete, said DTZ's SE Asia chief operating officer Ong Choon Fah.

They may enjoy a great headstart over developer-owned malls (the recent trade ministry study showed that rents grew 20 per cent at Reit malls between 2009 and 2013, compared to 9.2 per cent for single-owner malls on a compounded annual growth rate basis), but they are their own greatest enemy.

"In a way, Reits are a victim of their own success, because they always have to compete against themselves, to how well they did last quarter," said Ms Ong.

Part of the reason for Reits' active management of their malls is that they have to account for what they have done, to investors every quarter. Also, because every square foot is a revenue generator, Reits tend to squeeze returns - both rental and advertising - from their space.

The difficult part, says Chew Tuan Chiong, CEO of the manager of Frasers Centrepoint Trust, is finding that equilibrium - how much you can increase the leasable floor area by without resulting in clutter or deteriorating the shopping experience; how much rent to charge tenants so that they will stay and the Reit can still distribute a decent return to unitholders.

"It's actually the equilibrium that we are striving at. It makes no sense for us to charge too high a rent and change tenants too frequently because there is downtime every time there is a tenant change. Our objective is to help tenants succeed because if they don't do well, it affects us too. The relationship between landlord and tenant is quite symbiotic."

Yet, it has come to this: that retailers' rental and manpower woes have turned them cautious about expansion. FJ Benjamin is relooking which stores to keep and which to give up for profitability or strategic reasons, while restaurant chain The Rotisserie said it will relook its outlets when it is time to renew their leases.

But are there really as good non-Reit alternatives out there, and can they be effective substitutes?

DTZ's Ms Ong believes that some developer- owned malls can be as well managed as Reit malls, with less traffic but higher conversions to sales. She cites the example of Allgreen Properties' Great World City, favoured by shoppers for its good tenant mix, expanse of space and slower pace.

As for strata-titled malls, they can sometimes work for certain target groups, as in the cases of Lucky Plaza and Queensway Shopping Centre. "Sometimes people also want to go somewhere a bit disorganised, so there's an element of surprise," Ms Ong said.

At least 600 "more promising lots" of new strata shops in mixed development projects are scheduled for completion in the next couple of years, which may reverse the image of strata malls as small-sized, drab malls lacking in diverse retail offerings, said R'ST Research director Ong Kah Seng.