How to get a discount on your rent, Mark McInnes style

Australian employers are still suffering under some of the world’s most expensive retail rents, according to the latest figures released by CBRE, but local business may be in for a reprieve if the European debt crisis begins to take hold.

Local retailers have been suffering under higher rents for some time, only pressured further by the arrival prominent international stores. But Premier Retail chief Mark McInnes described at his annual general meeting yesterday how he’s able to negotiate some discounts.

The former David Jones chief described how he’s able to play hard ball and focus on internet sales in order to gain some much-needed discounts.

“Portmans in Canberra Centre is the most obvious example,” he said. “We’re doing $800,000 in that store – it’s a terrific store for us – but we’re paying $400,000 in rent and we’re basically breaking even.”

“We said to the landlord, “well, we’re going to shut. We’ll put an ad in the Canberra Times saying ‘Go to Portmans.com.au and if you don’t want to go online, Go to Belconnen’.”

“And our rent reduced 30%.”

The story is an unusual reprieve in a country where retail rents are among the highest in the world, and landlords are keen on maintaining their returns. According to the latest CBRE report, Sydney was the third most expensive city at $US1,224 per square feet every year, while Melbourne and Brisbane followed in 8th and 9th place.

Retailers have been calling for landlords to lower their rents for some time, with even prominent chains such as Baker’s Delight complaining that prices are too high.

As retail experts point out, the spending environment isn’t getting any better, either – the mid-year budget outlook released yesterday shows GDP will reach just 3.25% over the next two years, down from 4% and 3.75%.

With the current spending environment set to remain for quite awhile, retailers are fearful landlords will continue to demand the same amount of money.

But Simon Fonteyn of Lease Info says this may not be the case, especially if the European debt crisis spreads to Australia. “It’s a complicated situation,” he says.

“The critical period will be over the next three months. If things go well, then slower GDP growth may not be as significant,” he says.

Fonteyn notes the GDP forecasts, and agrees that spending is subdued, but says it is difficult to predict how landlords will react over the next few years given the current turmoil in the market.

“One thing to bear in mind is that structural adjustments occur when leases come up for renewal. There is an adjustment process that changes when tenants are struggling and signing leases,” he says.

“The other issue at the moment is that you’re having a bit of a situation in Australia where there is a stratification of the retail market. Some sectors are doing well, and others such as middle market fashion and accessories are doing very poorly.”

On the other hand, he says, some areas such as take away food, coffee and cafes are doing very well, and retailers may expect some sort of rental increase over the next couple of years in those sectors.

“The fortress centres with strong demographics have waiting lists. The bigger landlords are playing as hard as ever, because they have demand that exceeds supply.”

“GDP is not the best indicator of how retailers are going to fare. Something that could be as impactful is if we had a drop in interest rates, which looks likely now.”

Another issue is the European crisis, Fonteyn says, with the effects able to spread to Australia. If retail spending continues to fall, he says that could have the effect of keeping international pressure out of the market.

More international shops have been finding their way to Australia recently, and in some cases, this is pushing up rents.

“Maybe if the market is perceived to be cooling a bit, the internationals might not get as excited about coming here, and it could have the effect of dampening international competition.”

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