By Michael Pascoe
After earning a rapacious reputation during Australia's long boom, retail landlords are slowly coming to their senses, learning from the disaster of the British retail collapse and doing quiet deals with troubled tenants.
The choice between reduced rent and a shop being empty for a year or two should be a no-brainer, but the long golden summer of Australia's economic good times dulled the mental agility of some members of the landlord class. In Britain, the boom caused full frontal lobotomies.
Today's official retail sales numbers only tell part of the story of reduced profitability that's being acutely felt in some sectors and regions. And what's sometimes overlooked by commentators outside the retail sector is the impact on the bottom line of the marginal sale when fixed costs are such a large part of the business.
Whatever the truth of claim and counter-claim about nimble Fred Bart's scheme of arrangement for his Sleeping Giant chain, there is a bigger story lurking round its edges about retail rents.
But first a cautionary tale, an example of what's being scaring the daylights out of retailers and landlords and keeping them lobbying hard for Kevin Rudd's cash giveaways:
Land of Leather was a conservatively-run, debt-free British sofa chain. In 2007, it had sales of 240 million pounds for a pre-exceptional items profit of 18.5 million pounds and 16 million pounds after exceptionals. The year to August 2008 wasn't as strong - turnover of 232 million, pre-exceptionals profit of 2.4 million with exceptional items then wiping out 2.7 million to leave a loss of 400,000. Never mind, Land of Leather had 15 million pounds sitting in the bank and no debt.
And then the global financial crisis hit. In the four months to the end of November, turnover was down to 40 million pounds - about half the running rate of the two previous years - and the company lost 5.3 million. In January the administrators moved in, all the cash had gone, no one could be found to buy the business and all the stores are being closed.
Remember that this was a profitable, debt-free business with plenty of cash in the bank. Demand crashed and it couldn't reduce its fixed costs fast enough to match that fall. No prize for guessing what the retailer's biggest fixed cost was.
Move forward to Australia and there are encouraging signs that both landlords and retailers have learned from the experience of LoL and others. Deals are being done, albeit mainly by smaller landlords who perhaps are closer to their tenants and more aware of the impact empty shops would have on their own bottom line and property valuations.
Instead of waiting for the red ink to hit and then scrambling, I've heard of rent reductions in the order of 15%, sometimes with strings attached should sales prove better than presently expected. It helps the tenant in the negotiating process if their lease doesn't have long left to run.
More amazingly, there's an unconfirmed story of a Westfield tenant who's been offered a 15% reduction after the tenant gave notice that they didn't want to renew the lease. Yes, Westfield - a mob with a fearsome reputation for being prepared to ruthlessly suck tenants dry, happy to boast that there are always plenty of other wannabe shopkeepers lined up to take the place of Westfield tenants who can't handle the rent increases.
This is good economic news for all: empty shops have a cancerous effect on any shopping precinct; retail employment is maintained; the landlord maintains an income stream, albeit a reduced one, with which to service their mortgage; the mortgage gets paid and a bank somewhere down the line isn't faced with the problem of possible foreclosure and sale.
Besides, ask any shopkeeper and you'll be quickly told that retail rents have ballooned in recent years, losing all touch with reality. But shopkeepers always say that.
Well, almost good news for all. For the REITs that will eventually have to reflect lower rents, it feeds into the game of russian roulette the banks are playing with them. The banks, like the landlords, need to be a little more understanding instead of continuing to chase whatever equity might remain in this battered sector.