By Kyle Swain, Retail Director Australia & New Zealand, Lpc Cresa
The impact of the coronavirus on retail tenants is unique and unprecedented. It is unrelated to normal property and retail business cycles and characterised by uncertainty – including an escalating risk of complete business failure.
What assistance is available?
This is a time that calls for extraordinary collaboration between tenants and landlords in pursuit of commercial and retail leasing outcomes that will enable both tenants and landlords to survive this challenging period and get ready for life post COVID-19.
Landlords have much to lose as their tenants’ businesses face a prolonged period of financial distress which may see many businesses close and large numbers of empty shopfronts by the time this all ends.
We have been seeking ‘first stage’ rent relief on behalf of a number of our clients since the impact of COVID-19 started to be felt. There have been some fantastic responses from landlords who understand this is a time to band together and share the load to ensure a positive outcome for both parties in the longer term.
Unfortunately, a number of landlords remain stubbornly insistent on the tenant meeting their legal obligations under the terms of the lease or at best, are requiring significant supporting financial and other information in support of each store’s claims for rent relief due to the decline in sales.
There are over 140,000 retail businesses in Australia accounting for just under 5% of our GDP and 11% of all employment in Australia. The industry is the bedrock of our economy and the Government recognises the potentially devastating impact mass retailer failures will have on our economy long after the coronavirus threat is over.
The Government has already implemented some fantastic initiatives to assist small and medium sized businesses (up to $50m in turnover), and landlords are rightly expecting that tenants access all the benefits provided under the Government support measures before seeking rent relief from them.
The National Retail Association is providing up to date details on these initiatives, which include opportunities to improve your short term cashflow through initiatives such as:
- Ability to access up to $10,000 this financial year and another $10,000 next financial year from your superannuation, (tax free)
- A rebate of between $20,000 and $100,000 of income tax you paid for your employees based on your BAS due at the end of March, – likely to be rebated to you in late April
- Payroll tax refunds to smaller businesses in Victoria and deferred payroll tax for July, August & September
- 50 percent wage subsidy for trainees for up to nine months
Aligning costs with current revenue
In addition to taking advantage of the Government support and stimulus initiatives, every retailer should be making an effort to reduce both their operational and occupancy costs to better align current expenditure with decreased revenue.
Most retail businesses are already tightly managing operating costs as a percentage of revenue. With sales decreased, operating costs will need to be cut wherever possible. As much as we are all trying to keep people employed, landlords have already shown a willingness to allow reduced trading hours allowing retailers to reduce salary costs without losing any further sales.
Other areas you can make savings on include:
- Defer leasing & rental costs on items such as coffee machines and POS Software.
- Take advantage of bank initiatives on business loan repayments
- Reduce stock orders and negotiate deferred payment terms with suppliers
It is critical that you engage with your landlord now to achieve initial rental concessions. Your landlord is a key stakeholder in your ‘pandemic plan’ so you need to involve them early and regularly. When they understand you have included the government assistance options and are closely managing your operational costs, they will be more likely to buy in to your plan and approve measures required to manage occupancy costs on a short-term basis.
Initial rent relief is the first measure but may need to be reassessed on a monthly basis before conditions eventually return to normal. As we are expecting this to last at least six months you should be looking ahead at what events may be coming up that may present an opportunity to reduce the burden on capital expenditure and push the savings back in to operating cash. Some suggestions include:
- defer new store openings (deed of variation to the lease)
- extend timeframes to finalise negotiations on critical lease events such as lease renewals and market rent reviews.
- Defer required shop refurbishments
- Request a freeze on annual rent increases
As the tenancy and leasing partner to the National Retail Association, Lpc Cresa is offering an additional discount on our already special NRA member rates during these challenging times. If you’d like assistance to action your own ‘pandemic plan’ you’ll receive a 20% discount on standard service fees for advice and representation.