For most businesses, paying the rent is one of their most dominant expenses . Most high-street retailers rent their property on lease terms for the rent to be paid quarterly in advance. Why? It is an historic precedent designed by lawyers acting for landlords to give them risk protection in case the tenant fails in that three months .
When times are tough, an increasing number of retailers try to negotiate new terms. Even if they cannot reduce the rent payable, then perhaps they can move the payment date to, at best, monthly in arrears.
The yield that valuers use to calculate the capital value is based on many things, including the rent, the date payable, the location of the property and the perception of the tenant's financial strength. As the perception of risk increases, so does the yield, causing the capital value to go down. In the past few years, market conditions have doubled the average yield used for prime retail property to about 8%, with a consequent halving in capital value.
If the payment date shifts, adversely affecting the landlord's cashflow, and the perception of risk increases further, then the yield could move out a further half a point, which could create a further drop in capital value of 5% to 7.5%. So, it is easy to see why landlords would resist the change in payment date.
However, most would be wise to consider doing everything possible to keep rent-paying tenants rather than allow the unit to fall vacant. A vacant property means no rental income and rates to pay on the empty store, together with outgoings such as insurance or service charges.
Landlords and their tenants need to work together to find a mutually acceptable solution that keeps the tenant trading and yet maintains capital value for the landlord. The alternative? Tenants have too little cash to pay their debts as and when they fall due, and landlords find their liabilities are greater than their assets. Failing either of these two tests means a company is trading insolvently - a big risk for directors, shareholders, lenders and staff and all to the detriment of the company's reason to be: the customers.
Barry Gilbertson is a partner at PricewaterhouseCoopers.
When times are tough, an increasing number of retailers try to negotiate new terms. Even if they cannot reduce the rent payable, then perhaps they can move the payment date to, at best, monthly in arrears.
The yield that valuers use to calculate the capital value is based on many things, including the rent, the date payable, the location of the property and the perception of the tenant's financial strength. As the perception of risk increases, so does the yield, causing the capital value to go down. In the past few years, market conditions have doubled the average yield used for prime retail property to about 8%, with a consequent halving in capital value.
If the payment date shifts, adversely affecting the landlord's cashflow, and the perception of risk increases further, then the yield could move out a further half a point, which could create a further drop in capital value of 5% to 7.5%. So, it is easy to see why landlords would resist the change in payment date.
However, most would be wise to consider doing everything possible to keep rent-paying tenants rather than allow the unit to fall vacant. A vacant property means no rental income and rates to pay on the empty store, together with outgoings such as insurance or service charges.
Landlords and their tenants need to work together to find a mutually acceptable solution that keeps the tenant trading and yet maintains capital value for the landlord. The alternative? Tenants have too little cash to pay their debts as and when they fall due, and landlords find their liabilities are greater than their assets. Failing either of these two tests means a company is trading insolvently - a big risk for directors, shareholders, lenders and staff and all to the detriment of the company's reason to be: the customers.
Barry Gilbertson is a partner at PricewaterhouseCoopers.
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