As rebates end, restaurants and retailers reel from rent, deposit hikes

Singapore

SOME Singapore retail and food and beverage (F&B) businesses are grappling with unexpected rental increments and hefty security deposits (SDs), as they struggle to get back on their feet after Covid-19's impact, The Business Times has learnt.

To be clear, the situation is far from straightforward, as numerous nuanced scenarios play out and rental discussions often turn acrimonious. Still, that has again worsened simmering tensions between tenants and landlords, following last year's months-long tussles over rebates, while a pandemic compounds their difficulties.

Several tenants told BT they faced rent increments of up to 20 per cent during lease negotiations since August and in recent weeks.

It is also not uncommon for some landlords to now ask for four to six months' SDs for a one-year renewal. The usual practice was for one month of SD per year of the lease, which worked out to a three-month SD for a typical three-year restaurant tenancy.

A source in the F&B industry said: "Pre-Covid, hardly any landlords offered one-year extensions, but now many want shorter renewals so they don't lock in low rents for too long. But they're asking for large SDs at the same time... A business paying S$20,000 rent must cough up S$100,000 cash for a five-month SD to stay a year. That's a huge outlay and very stressful."

One person involved in lease negotiations said some of those hiking rents or refusing discounts "are not in tune with reality".

To be sure, not every retail or F&B tenant has had to fork out bigger sums. Landlords have also maintained previously-discounted rates, cut rents further or restructured leases. "There are really good landlords, typically the smaller ones, that have been very supportive and understanding," a chain store operator said.

In Singapore's central region, Q4 average retail rents fell 5.2 per cent quarter on quarter, according to the Urban Redevelopment Authority's figures. A retail industry source said several operators vacated large spaces lately, which led to their landlords cutting rates to promptly secure replacements. Plus, with the economy hurt by a global health crisis, landlords too have to brace for more closures.

Singapore's biggest mall landlord, CapitaLand Integrated Commercial Trust (CICT), posted a 6.6 per cent negative rent reversion in 2020. But it will now accept lower rents only for tactical reasons, Tony Tan, chief executive of CICT's manager, said in a post-earnings call last Thursday. "We remain proactive in working with our tenants to address their space and leasing requirements with flexibility and optionality," Mr Tan added.

A spokesperson from suburban mall owner Frasers Centrepoint Trust noted that "the sustainability of rent is important to both the landlord and retailers, and this is an important consideration in our lease discussions". While the leasing environment is still challenging, rents of prime suburban retail spaces are "expected to remain competitive and resilient, supported by stable foot traffic", it said.

Far East Organization's assistant director, retail business group, Lionel Chua told BT that it "strives to be fair and equitable" when negotiating rent structures, and will continue to engage with tenants individually on a case-by-case basis. "We understand the difficulties that tenants are facing and will assist where we can," Mr Chua added.

Meanwhile, UOL Group and UIC have provided targeted support to eligible retail tenants since March. "Apart from complying fully with government regulations, we continue to maintain communication with our tenants and tailor appropriate support," a UOL spokesperson said.

City Developments Limited (CDL) has offered, on a case-by-case basis and "where warranted", short-term lease restructuring with a lower base rent and higher gross turnover rent, so both parties "share risks and returns in the current challenging retail market", its spokesperson said. The developer also had flexible rental payment plans.

BT also understands that in certain cases, a large rental increment could be from a very low base. For instance, below-average rental rates are common at the start to attract first-time tenants. It is then usual practice to hike rates when renewing the lease, if the tenant's sales are clearly improving. The eventual rent may thus still fall below or reach market levels.

But to raise rents based on better revenues may be ignoring the increase in tenants' costs, especially manpower costs, sources said. And on the whole, takings are not back at pre-Covid levels, despite recovering substantially since the lows of early to mid-2020. HL Bank strategist Jeff Ng has said that retail sales growth could return to pre-pandemic levels possibly only in late 2021.

The F&B source told BT that in general, revenues in the industry remain 20-30 per cent below pre-Covid numbers.

"There's a misconception everything's rosy because restaurants look full and have long queues. But the seating capacity has just dropped tremendously," he said.

At the same time, a case could be made for landlords having to cover their own rising costs. It may be understandable for rents to go up slightly if malls need to introduce new initiatives after Covid-19, the retail industry source said.

A retail distributor said that in some scenarios, a high asking price could simply be an aggressive negotiation tactic - lower rents may be possible if tenants push back: "We know of tenants managing to sign leases with rent reductions, sometimes down 10-15 per cent."

A cafe operator also said some landlords begin by offering an unrealistically low per-square-foot (psf) rent, or a fixed percentage of sales - whichever is higher.

"But this psf rate is so low that we'll definitely hit the higher sales figure and end up paying more rent," he said. "In the second and third years, the rent will be jacked up because we received a discounted psf rate in the first year."

BT also learnt that certain landlords upsized the gross turnover rent component just as the tenant's sales started to improve.

The result is a higher gross amount collected, even if the base rent's proportion was reduced. That eats at tenants' margins at a time when cash could be put back into the business or saved for rainy days.

"Landlords should enable tenants to do a sustainable business and have some profits left for digital transformation and marketing campaigns," said the retail industry source. "If you take every dollar they make, it won't be viable for retailers to adopt new initiatives."

The retail distributor said: "It's just good conscience to leave some money on the table for tenants, even though the landlord can take all."

At times, relocating or downsizing may make more sense than biting the bullet to accept unsustainable rents. With e-commerce increasingly viable, businesses should also prepare their staff to take on online-centric sales roles, a houseware retailer suggested.

Tay Eu-Yen, of-counsel for entertainment and hospitality at Providence Law Asia, recommended tenants consider their options carefully before renewing leases on harsher terms, although "one factor no doubt would be the cost of leaving your business and reinstating the premise".

There is no law obliging landlords to maintain rents or avoid imposing harsher terms, noted Ms Tay, who is also legal adviser to the Restaurant Association of Singapore.

The Fair Tenancy Code being deliberated would potentially help even out the bargaining field, said Ms Tay, but landlords' bargaining power "creates a huge commercial disparity that, without legislation to regulate the fairness of terms, cannot be adequately addressed by smaller tenants".