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

Statutory Changes
Municipal / Council RatesYesYesYesYesYesYesYesYes
Water & Sewerage RatesYesYesYesYesYesYesYesYes
Land TaxYesYesYesNoNoYesYesNo
Operating Expenses
Insurance PremiumsYesRYesYesYesYesYesYes
Air Conditioning / VentilationYesYesYesYesYesYesYesYes
Common Area CleaningYesYesYesYesYesYesYesYes
Centre SupervisionYesYesYesYesYesYesYesYes
Car ParkingYesYesYesYesYesYesYesYes
Common Area ElectricityYesYesYesYesYesYesYesYes
Fire Protection / Public Address SystemYesYesYesYesYesYesYesYes
Gas & OilYesYesYesYesYesYesYesYes
Lifts & EscalatorsYesYesYesYesYesYesYesYes
Pest ControlYesYesYesYesYesYesYesYes
Repairs & MaintenanceYesYesYesYesYesYesYesYes
Emergency GeneratorsYesYesYesYesYesYesYesYes
Energy Mgmt / Bldg Automation SystemsYesYesYesYesYesYesYesYes
Security / Access ControlYesYesYesYesYesYesYesYes
Sewerage Disposal & SullageYesYesYesYesYesYesYesYes
Salaries & WagesRYesRNoYesYesYesYes
Administration / Management FeeRYesRNoYesYesYesYes
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.