Turnover rents a ‘sensible transition solution’

Turnover rents are a short-term solution for the uncertainty of the coronavirus crisis, but landlords and tenants will want to return a more normalised fixed rate model once the market begins to get back to normal, CGA’s Follow the Monday has heard.

Mark Sheehan, managing director of Coffer Corporate Leisure, said investors choose property because it was low risk and low yield, but turnover rents turned landlords into operators, which was higher risk, and demands more reward.

Sheehan said there were opportunistic deals being done in the suburbs, as landlords make generous offers to early stage operators of fully fitted sites at low cost.

Meanwhile Graeme Smith, managing director at AlixPartners, called turnover rents a “sensible transition solution”, but agreed that longer term, tenants and landlords would want to normalise into a fixed rent.

Speaking to the webinar, Sheehan told the webinar that generally turnover rents worked well where a landlord has complete control of a curated estate.

He said: “Generally property is seen as a very low risk asset class. People pay very low yields for property because it’s safe, they sign up a lease commitment, get a rent, which they expect to increase over a very long period of time.

“If that is changing, if we’re looking at turnover rents or complete uncertainty over long periods of time on rental levels, property prices will have to come down substantially because a property business would be much more akin to an operating business, which is much riskier, so you need a greater reward.”

Agreeing with the Sheehan, Graeme Smith said: “From my perspective I see this very much as a transitional solution. Because what drives property prices is that stable fixed income yield that people look for,

“We’re really switching to turnover rents at the moment because of the fact that it’s so uncertain, and in that scenario the flexibility of turnover linked rent is really important,

“But once you get into a more stabilised environment, if your site is performing well on a turnover then you’ll be paying more, so from a tenant perspective once the market has normalised and stabilised, they will want to get it onto a fixed rent, so all of the upside they’re generating is going into their pockets.”

Meanwhile, Sheehan described how deals are being done on property.

He said: “Our sister company Davis Coffer Lyons are quite interestingly doing quite a number of deals with smaller operators, who are taking advantage of fully fitted restaurants that are coming out of other operators.

“It’s opportunistic, with capex of £50k rather than £750K, in the suburbs generally, sub £100k rents.

“Landlords are making generous deals to get tenants into good locations.”

Meanwhile Paul Newman, head of leisure and hospitality RSM UK, said the shifting dynamics of property was influencing how operators were managing their legacy estate.

He said: “We’re seeing landlords offering much lower attractive rents, and bigger capex contribution, so that’s making operators look at their existing portfolio, and probably cutting much deeper than they might have in terms of those sites that are not viable.”