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The demise of the landlord

The current stand-off between landlords and tenants in shopping centres is escalating. This week we have seen Mosaic Brands (MOZ) locked out of the shopping centres of Scentre Group (SCG) – that’s over 100 stores. Premier Investments (PMV), the owners of Smiggle and Peter Alexander brands are pushing landlords to charge rent based on (currently depressed) revenue. That would give centre owners an incentive to get foot traffic through their buildings, but also exposes them to the vagaries and fickleness of consumers and the stocking decisions of their tenants.

The dilemma for landlords is that that if they don’t charge full rent, they risk lower returns for their shareholders. But if they try charging tenants full rent now, the tenant could go broke. A shopping centre with a lot of vacant space isn’t an appealing proposition for the consumer.

So there is an argument for helping your tenants stay in business – charging full rents in cases where the centres can’t deliver the requisite foot traffic will merely accelerate the demise of marginal retailers. To date, we have already seen store closures from Bardot, Target, Michael Hill, T2 and Big W along with many smaller stores.

Some retailers are just refusing to re-open stores until they get rent reductions. If shoppers are aware that stores are not being opened, they may choose not to visit the centre altogether. The more consumers get accustomed to buying online, the more likely it will become habit forming, marking a permanent reduction in the share of their wallet that is derived from centres.

There are also longer-term implications. Retailers may choose to favour one landlord over another when they roll out new stores based on how they were treated during COVID. Therefore, “mean” landlords who overestimate the long-term bargaining position of their buildings may be unable to attract higher quality retailers when COVID blows over.

These headwinds will continue to persist and impact the outlook for both the listed operators of shopping centres and those bricks and mortar retailers, while providing a positive headwind for online retailers.

We are invested in City Chic (CCX) which has an impressive online presence and focus on growing their online footprint both domestically and in the US. Meanwhile, companies such as Mosaic Brands (MOZ) have not followed the same approach. The difference can be seen in their respective share price performances!

Till next week happy investing.


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