Demystifying retail leasing benchmarks in Australia: A guide with LeaseInfo

Benchmarking retail leasing costs in Australia has been critical for retailers and landlords alike in Australian shopping centres. However, traditionally, these benchmarks have caused friction between landlords and retailers. This blog examines these concepts and delves into how accurate retail leasing data can facilitate both landlord and retailer viewpoints, leading to superior negotiated outcomes between these parties.

The most common variables in retail benchmarks are as follows:

  • Base Rent: The minimum rent a retailer pays for its leased space is typically quoted per square metre (sqm).
  • Recoverable Operating Expenses (Outgoings): These encompass statutory and operating costs, including land taxes, council rates, building insurance, management fees, common area power, repairs and maintenance, security and cleaning, etc.
  • Marketing Levies: This is usually a percentage of the base rent, typically between 3% and 5%, which the retailer pays to promote the centre.

These three variables, when added, calculate the tenant’s occupancy cost.

There are two methods to benchmark rents: the occupancy cost ratio and the profitability ratio method. The former is used primarily by landlords, and retailers use the latter. Let’s look at these ratios in more detail:

Occupancy cost ratio method

The occupancy cost ratio method is the tenant’s current annual sales data / current annual occupancy cost. In shopping centre specialty stores in Australia ( under 450m2), these ratios range between 10- 20% or higher in certain CBD stores. The variability in this range is due to different usage categories, as each has different margins and sales turnover.

This is the primary method for benchmarking retail categories by landlords and is used to gauge whether a retailer is under or overpaying in a centre.

Retailers, however, argue that they generate tenant sales from their business’s goodwill and should ignore this method when setting rent.

Profitability ratio method

Retailers often use the ratio of total occupancy cost to profitability to argue that they pay rent out of profits, not sales. For example, a retailer pays $200,000 per annum in total occupancy costs in a shopping centre and turns over $1.5 million, making an EBITDA (Earnings Before Interest Tax Depreciation and Amortisation) of $100,000 per annum. This would imply a profit-to-rent ratio of 50% and an occupancy cost ratio of 13%.

Why benchmark calculations matter

A clear picture of total leasing and occupancy costs helps retailers and landlords with budgeting and financial forecasting, allows correct comparison across categories, and facilitates better-negotiated outcomes between the parties.

Introducing LeaseInfo: your retail leasing benchmarking tool

LeaseInfo, Australia’s leading retail leasing data source since 2005, empowers both landlords and retailers with the tools to calculate total occupancy costs for benchmarking retail rental calculations. Leaseinfo allows:

  • Instant access to verified data: Gain confidence with verified information on rents, lease expiries, escalations, options, and even lease copies.
  • Powerful comparison tool: Analyse leases across shopping centres, retail categories, sales/m2, and demographics.
  • Data alerts: Leaseinfo can notify you by email or SMS of any search within the database, including competitor expiries and specific new retailers or categories.

LeaseInfo’s impact: By analysing over 90,000 leases, LeaseInfo is a powerful tool for benchmarking retail rental rates and total occupancy costs and ensuring the best possible leasing outcome. By understanding the different components of retail leasing costs and leveraging LeaseInfo, you can correctly benchmark against your category to ensure long-term viability and negotiate confidently.