(How Much Is) That Doggie in the Window? – Bob Merrill (January 1953)
As the quote above reminds us, retail is all about enticing shoppers to part with their money to buy the goods on display. Historically, retailers have displayed their goods to persuade passing trade to buy their wares. Initially, this would have been on stalls in markets, then in fixed shops in the high street of market towns and, latterly, in purpose-built shopping centres. The retailer then paid a rent/fee for the space in question. The rent being linked to the “worth” of the space to the retailer.
This is the retail model that has endured, pretty much unchanged, through to the early 2000s. Concentrating on shopping centres, a landlord of a shopping centre aims to maximise rental cash flows from the retailers over time and thus maximise capital value.
But the Market Value of a Shopping Centre, which is an estimate of the price that an investor would pay for the shopping centre at any point in time, isn’t just determined by the cash flow created. Price in the market is influenced by the number of potential buyers in the market. The more demand then, all other things being equal, the higher the expected price. Price also reflects potential. For example, a shopping centre might be run poorly by the current owner but incoming buyers can see that it has the potential for a greater cash flow in the future if run more efficiently. Market Value or Price will capture this as well. So the way in which the shopping centre is leased and the types of leases offered all will affect rents and capital value.
So Market Value is influenced by the way in which the business is run, the way in which the building is maintained and managed and the synergy between the owner and the retailers. Landlords and tenants/retailers are in partnership. So how do valuers value shopping centres?
Retailing is changing. Without rehearsing all the arguments on why some retailers are struggling in the current market, it is fair to say that the market is going through a fundamental readjustment of how consumers shop. In the UK, 20% of retail sales are now online but researchshows that, of these sales, 30% are also related to physical stores (i.e. a consumer looks at options in the shops and then orders online). So given that the rent paid for physical space is, historically, a reflection of what the space is worth to a retailer, how does this fact impact upon rents? There are sales (online) that won’t be captured by a store’s turnover.
Ultimately the rents payable are still determined by the attractiveness of the space to the tenant. They will pay what it is “worth” to them. This maybe based on turnover in the actual store (in which case, turnover rents make sense), sales generated off site (a fixed rent with review makes most sense) or a simple shop at an agreed core rent.
The principal question is whether valuers are capturing all these changes in their valuations? Yields have moved out to reflect the uncertainty in the market and the erosion of retailers’ covenant strength in the current market but are the rents being agreed capturing the impact of online sales. The shop window is now much bigger than the physical footprint of the shop so how does the valuer know the real worth of the space occupied.