For most Australian retailers, property leases represent one of the single largest financial commitments on their books. Shopping centre tenancies, distribution centres, and head office leases all contribute to a retailer’s cost base — and since the introduction of IFRS 16, they also contribute directly to the balance sheet. This shift has fundamentally changed how retailers should be thinking about their property strategy.
From Off-Balance-Sheet to Front and Centre
Under the previous standard (IAS 17), operating leases — which covered the vast majority of retail property agreements — were disclosed in the notes to the financial statements but didn’t appear as assets or liabilities on the balance sheet. Rent was simply a line item in operating expenses.
IFRS 16 eliminated this distinction for lessees. Now, nearly every lease above the low-value and short-term thresholds must be recognised on the balance sheet as a right-of-use asset and a lease liability. For a national retailer with 50 or more store locations, the cumulative impact can be substantial — adding tens or even hundreds of millions of dollars to both sides of the balance sheet.
The Financial Metrics That Shift
This isn’t just an accounting technicality. The on-balance-sheet treatment of leases changes several key financial ratios that retailers, investors, and lenders monitor closely.
EBITDA increases. Because lease payments are no longer treated as a single operating expense, EBITDA rises under IFRS 16. The lease cost is instead split between depreciation (on the ROU asset) and interest (on the lease liability), neither of which sit within EBITDA. This can make a retailer’s operating performance appear stronger, but savvy analysts adjust for this.
Leverage ratios increase. The addition of lease liabilities to the balance sheet means debt-to-equity and net-debt ratios rise. This can have real consequences for retailers approaching their banking covenants or seeking new financing.
Return on assets decreases. With a larger asset base (due to ROU assets), return on assets metrics are diluted — even if underlying profitability hasn’t changed.
Understanding these shifts is important not just for your finance team, but for anyone involved in property and leasing decisions. The commercial terms you negotiate directly affect these financial outcomes.
Practical Implications for Retail Leasing
Lease term decisions carry more weight. Every additional year on a lease term increases the liability. Retailers need to balance the commercial benefits of longer-term security — such as better rental rates and landlord incentives — against the balance sheet consequences. This is particularly relevant when weighing up whether to exercise renewal options.
CPI-linked escalations require ongoing attention. When lease payments are tied to CPI, the liability must be remeasured whenever the index changes and the payment adjustment takes effect. In a high-inflation environment, this can lead to frequent and material adjustments to both the liability and the asset. Retailers with large portfolios of CPI-linked leases need to stay on top of these movements.
Rent-free periods and incentives are accounted for differently. Landlord incentives reduce the ROU asset at commencement rather than being recognised as income over the lease term. Rent-free periods are effectively spread across the lease through the depreciation of the ROU asset. Understanding these mechanics helps retailers evaluate incentive packages more accurately.
Subleasing arrangements add complexity. If a retailer subleases part of its premises — something that’s become more common as retailers optimise their space — the accounting treatment depends on how the sublease is classified. This can create situations where the head lease and sublease are accounted for on different bases.
The Data Advantage
In this environment, having access to reliable, comprehensive property lease data is more important than ever. Retailers need to understand not just what rent they’re paying, but how their lease structures compare to the market — and what the financial reporting consequences of different negotiation outcomes will be.
By benchmarking lease terms, escalation structures, and incentive arrangements against comparable tenancies, retailers can make decisions that are optimised for both commercial outcomes and financial reporting impact.
LeaseInfo’s database provides this market intelligence for Australian retail leases, covering shopping centres across all states, centre grades, and tenant categories. Whether you’re evaluating a new site, renegotiating an existing lease, or reviewing your portfolio strategy, having current market data at your fingertips changes the conversation.
Book a demo at meetings.hubspot.com/joseph-kalk/leaseinfo to see how LeaseInfo can support your next decision.