Why grossing up rents is vital in shopping centre rental benchmarks

The Retail Tenancy Legislation governs the recovery of operational costs, known as outgoings, in Australian shopping centres in each state and territory, as well as the agreements set out in individual leases.

This blog examines how recoverable outgoings in retail leases vary across states, the different methods of outgoings recovery used, and the complexities of benchmarking across various centres and retail categories when using differing outgoings recovery methods.

The rising burden of outgoings in Australia

Outgoings in Australia are increasingly burdensome for both retailers and landlords due to several factors:

• Due to the high demand for land, land tax and council rates, based on land values, have been rising faster than the Consumer Price Index (CPI) in certain capital cities.
• In some cases, energy and power costs have doubled over the past five years.
• Insurance premiums have increased due to the frequency of natural disaster claims.
• Wages and other costs are climbing due to inflationary pressures.

These factors contribute to significant outgoing costs for retail space occupiers, which in some central business district (CBD) centres can exceed 25% of the rent.

Table 1: Typical Outgoings Recoverable by State

COST ITEM	NSW	QLD	VIC	WA	TAS	SA	NT	ACT
Statutory Changes
Municipal / Council Rates	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Water & Sewerage Rates	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Land Tax	Yes	Yes	Yes	No	No	Yes	Yes	No
Operating Expenses
Insurance Premiums	Yes	R	Yes	Yes	Yes	Yes	Yes	Yes
Air Conditioning / Ventilation	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Common Area Cleaning	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Centre Supervision	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Car Parking	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Common Area Electricity	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Fire Protection / Public Address System	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Gas & Oil	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Lifts & Escalators	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Pest Control	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Repairs & Maintenance	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Emergency Generators	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Energy Mgmt / Bldg Automation Systems	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Security / Access Control	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Sewerage Disposal & Sullage	Yes	Yes	Yes	Yes	Yes	Yes	Yes	Yes
Salaries & Wages	R	Yes	R	No	Yes	Yes	Yes	Yes
Administration / Management Fee	R	Yes	R	No	Yes	Yes	Yes	Yes
R = Restrictions

Non-recoverable items:

• Interest
• Depreciation
• Capital costs
• Contribution to a sinking fund for capital costs
• Lease preparation costs

Outgoings recovery methods

Outgoing recoveries in shopping centres generally fall into four categories:

1. Net lease: The lessee pays the rent and all the expenses listed in Table 1.

2. Increases over a base year – Partial gross: Outgoings are recoverable by the amount they increase over a base year.

3. Percentage of outgoings recoverable – Partial gross: Recoverable outgoings include only specific expenses, such as statutory outgoings or a percentage of statutory outgoings.

4. Gross lease: The rent includes all outgoings (non-recoverable)

With shopping centre owners using varying outgoing recovery methods, comparing rents across different centres becomes problematic. Grossing up rents allows for a like-for-like comparison, ensuring that benchmarks are meaningful.

For example, comparing a net rent of $1,000/m² in Centre A with a partially gross rent of $1,000/m² in Centre B without considering the differing outgoings recovery methods is ineffective.

At LeaseInfo, we use AI algorithms to estimate outgoings and gross-up retail rents. This allows us to benchmark retail rents and increases accurately. Our tools ensure precise and fair comparisons across different centres, retail categories, and retailers. This requires a detailed understanding of each lease, the type of centre, and the location state.

Learn more about LeaseInfo by visiting our About Us or book a demo to see how it can help you today.