Turnover Rents Are Great (But Not For You), Aviva Tells Shopping Centre Landlords

Aviva Investors is a great fan of turnover retail leases. But its enthusiasm doesn't extend to encouraging all of its retail landlord-partners to use them.

Aviva, which has invested in three of McArthurGlen’s UK outlet villages and owns roughly 55% of the new West Midlands outlet, said the base-rent-plus-turnover model was perfect for outlet retail. But the peculiar dynamics of outlet retail do not apply in shopping centres, and so lease structures there would remain different.

Top-up turnover rents have long been the foundation of outlet malls and regarded as one of the keys to success in a fast-moving sector. But in more traditional retail, disputes over what constitutes an in-store sale have stymied the growth of turnover rents. Online and click-and-collect sales are the major stumbling block.

“We are confident about outlet malls because they outperform the rest of bricks-and-mortar retail. What they sell is not easily available online, which protects it from e-commerce. It’s a day out which couldn’t be replicated online, and covenant strength is generally better,” Aviva Investors Director Darren Freed said.

Freed agreed that part of the success of outlet malls depended on the turnover-based leasing structures. “Turnover leases create joint venture-type relationships. It becomes a partnership between the tenant and the landlord,” Freed said, pointing to shared sales data and decision-making.

But outside the world of outlet malls, the obstacles are formidable.

“The first challenge is to get occupiers to sign up, because they are shy about sharing data. And the problem in existing shopping centres is you already have leases in place and a different retail model. There are pockets where you can replicate the turnover lease structure, and they may evolve that way, but the outlet world is different,” Freed said.

“It’s not that we wouldn’t do it, but we are all creatures of habit, and in a new development you might be able to go down the turnover rent route, but it is very difficult to implement if, for instance, retailers also operate click-and-collect from that site. The great thing about outlet malls is that problem of online sales doesn’t arise. It’s just a very different model.”