Massmart CEO slates ‘ridiculous’ rent escalations

Retail landlords under increasing pressure to reduce rentals or keep increases to a minimum.
Mitch Slape says it's time for the retail property sector to ‘be reasonable’. Image: Moneyweb

Although yet to recover from Edcon’s woes and downsizing, South Africa’s shopping centre landlords are set to face even more intense rental negotiations with other major retailers.

Massmart CEO Mitch Slape increased the pressure on retail landlords last week, when he slated the retail property sector for its high rentals and escalations, despite tough local economic conditions.

“Rental escalations in this market are ridiculous,” he said during a media roundtable in Johannesburg.

Read: Game over for fresh food at Massmart’s biggest chain

“You’ve got escalations in this market in the 7-8% range – there is nothing to justify that considering how the economy is doing and where inflation is sitting. There is no way that the retail sector can survive with these kinds of escalations. I think it is time for the market to be reasonable about them,” he added.

Slape, a Walmart veteran who was brought in six months ago to lead a turnaround of the group’s majority-owned Massmart business in South Africa, said the JSE-listed group would be talking to its landlords about reducing its rentals and keeping escalations at least in line with inflation.

Embattled Massmart, which owns retail chains such as Game, DionWired, Makro and Builders Warehouse, is set to report its first full-year loss of almost R1.4 billion for its 2019 financial year this week.

Store closures

As part of a turnaround plan revealed in January, the group is set to close some 34 DionWired and Masscash stores. Retail analysts expect that it will downsize stores in its struggling Game chain too.

Read: Massmart in need of an ‘Edcon-like’ overhaul?

Keillen Ndlovu, head of listed property funds at Stanlib, tells Moneyweb the sector is likely to see retailers “rationalising” the amount of space they occupy through the “right-sizing” of stores, as well as the closure of underperforming outlets.

Ndlovu predicts that retail rentals will fall.

“We will not be surprised to see rents fall by as much 10% as leases expire in the retail space. We may see annual rental escalations on renewed leases trend downwards from the 7-8% level to 6-7% levels, and maybe lower for the national tenants on long leases,” he notes.

“There’s much more focus on tenant retention, even if it means accepting a lower rent. In this environment, it’s more costly to lose a tenant than to retain one at a lower rent, as it takes longer to find a replacement tenant. In addition, there are other costs such as tenant installation allowances and broker commissions – and costs such as rates, taxes and security even when the space is vacant,” Ndlovu points out.

A few listed property counters have downplayed the potential impact of Massmart closing its DionWired stores. However, calls for lower rentals are likely to add further pressure on the bottom lines of these funds. Massmart is also yet to give details on possible downsizing of its Game stores, which is its largest chain with around 130 outlets.

Estienne de Klerk, chairman of the South African Real Estate Investment Trust Association (SA Reit), which represents the interests of the listed property sector, says many landlords are working with retailers to address some of the challenges in light of SA’s economic woes.

Rentals ‘relative’

“The story is broader than Game and Massmart. Other CEOs have also been complaining about rentals,” he says. “Rentals will be seen as high if you are trading poorly, but not all retailers, stores or shopping centres are in the same situation.

“This needs to be seen on a case-by-case basis, and landlords are trying to help where they can,” he points out.

“We also have to appreciate the fact that all industries are under pressure. Broadly speaking, the property sector is facing a variety of issues, including the fact that administered costs [electricity, water, municipal rates and so on] have escalated by more than 550% in the past ten years,” he adds.

Read: Rising rate bills adds to commercial property sector woes

De Klerk, who is also CEO of Growthpoint Properties SA, says despite massive increases in administered costs, services from municipalities and government entities have declined.

“The property industry has had to invest in things like road infrastructure and solar generation. This has increased the cost of doing business for us, but also offered efficiencies to our tenants.”

Meanwhile, on Edcon, he says it was an “anomaly” for the retail property sector to deal with. In Edcon’s financial lifeline restructure plan, several landlords took equity in the group while others had to reduce rentals as part of the plan.

Read: Edcon gets a lifeline from the public, landlords and lenders

“The reality is that Edcon was a complex matter,” says De Klerk. “There is no doubt that what we had to do as landlords with Edcon has created a dynamic we have to deal with in the industry.

“Massmart is not nearly as big as Edcon in terms of store numbers, so the impact of store closures will not be the same.”

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Landlords are being too greedy, especially in this economic climate. Success is a team effort and it’s a mutual relationship to help your tenants succeed. Why do landlords need to wait and see their tenants lose millions and close down instead of just compromising on the rent for a period?!

You do not help the economy by being too greedy. We are in a tough period. Accept it, compromise and dont kill your tenants. Times will get better and then you can increase then.

Perhaps you need consider that the landlord’s balance sheet is *inversely* related to that of their tenants.

Higher rental incomes equate to higher municipal valuations and higher rates and taxes over and above municipal annual increases.

Online retail will continue to put shopping centers under pressure. If I can order the same item from TakeaLot, delivered to my house for free vs Buying at the store and paying R300 for delivery… Why on earth would I still buy from the mall?

Landlords can up their prices all they want, and retail stores will simply pass down the cost to consumers, but at a certain point consumers will vote with their wallets and shop online. The ripple effect will close down retail stores. Surely this pattern already happened in America and should not come as a surprise.

Yep.and then if the tennant leaves, the place is empty and no money comes in.

Inflation might theoretically be 4% but go look at the increases in municipal costs! More like 15%

Even if that were true, how much do municipal costs make up of total landlord costs?

Fully agree. Why are the government not forcing municipalities to keep municipal increases (rates & taxes) in line with inflation… Easy – they steal so much they have to get the money from somewhere…

The property industry, in particular the retail sector, is characterized by monopolies. If you take the total retail space as shown in the shopping center data, 5-6 players control about 80%. That is the most monopolized in the world.

It is about time that the Competition Commission placed a cap on the property industry and the issuing of any further rights to centers or companies found to be in a monopolistic situation.

The culprits are the large (mostly listed) companies themselves as well as the municipalities, who just give rights to monopoly companies and monopoly retail centers in areas where there are no alternatives and what you are left with are high rentals and excessive escalations. This practice of monopolization is a throw back to the apartheid days.

The property industry is also infamous for charging a margin (above handling fee) for electricity and water as well as levies.

But don’t worry, the public are fighting back by buying online and shopping where prices are cheaper.

I am also waiting for the elusive ‘everyday low price’ of Walmart’s to kick in – if it ever does.

I think you’ll find that the definition of a monopoly is a single market player, not 5-6 competing for tenants. And owning a shopping center in an area with no alternatives is just a competitive advantage in a free market. Economics 101.

Wow,.. seriously??? This is basic demand and supply… we don’t tell car manufacturers that their prices are too high! There is tons of excess capacity and space but if you want your business in a strategic location then you must pay a premium for that. A landlord will only charge what is possible to obtain and retain a tenant. Massmart always has the option to move premises or change to another location…

Clearly shows that Massmart is in huge trouble when you start begging your landlord to lower their amount

With property you are not producing cars but are reliant on zoned land, which is impossible to find in built up areas. You can also ship a car, but you can’t ship a shopping center! So the regulators have to find ways on intervening on the monopolization of competitive space.

The property industry, in particular the retail sector, is characterized by monopolies. If you take the total retail space as shown in the shopping center data, 5-6 players control about 80%. That is the most monopolized in the world.

It is about time that the Competition Commission placed a cap on the property industry and the issuing of any further rights to centers or companies found to be in a monopolistic situation.

The culprits are the large (mostly listed) companies themselves as well as the municipalities, who just give rights to monopoly companies and monopoly retail centers in areas where there are no alternatives and what you are left with are high rentals and excessive escalations. This practice of monopolization is a throw back to the apartheid days.

The property industry is also infamous for charging a margin (above handling fee) for electricity and water as well as levies.

But don’t worry, the public are fighting back by buying online and shopping where prices are cheaper.

I am also waiting for the elusive ‘everyday low price’ of Walmart’s to kick in – if it ever does.

I think the ones to blame are the board executives which I assume were a large number that collectively agreed on those escalations and rentals based on their experience, knowledge and forecasts.

-Lets be realistic, I doubt that one or two percent off the “ridiculous” escalations would have kept Dion Wireds doors open

-Game and Dion both lack oomph, their offerings were tired and management did little to change that. Game still looks the same it did 20+years ago

-Their landlords didnt ask them to spend a fortune on a grocery section(they actually for good reason cautioned against it —maybe take some advice from your landlords in future)

-Perhaps Game would be better suited in a Value Centre(where rentals are cheaper) rather than a high end mall

-So we have been down this road with Edcon, they received a huge rent cut…. Have they succeded in getting me back into their stores NO. How will giving Massmart(who already receive a preferential rental rate over 70% of the rest of a malls tenants) a rent cut be any different?

Graspi

If you sign a rental agreement and then complain about the terms, best you think about how you sign these things in the future.

Massmart are going to run into all sorts of problems if they think they can have their rentals reduced.
In all instances their is a lease which is signed with an agreed annual escalation for a fixed period of time. If tenants are savvy they should have a periodic rent review embodied into the lease which gives one the opportunity to “adjust” the monthly rental and forward looking escalation. Tenants need to wise up as the landlords are going to take as much as they can – they also have shareholders who are looking for outperformance

The best is to negotiate . I have some rental properties and the standard lease states an 8% increase which i negotiate down with good tenants and leave to get rid of troublemakers and bad payers.
I think most landlords would love to have premium clients like Massmart.
Take a good look at how many shops are standing vacant, times are tough and physical retail is dying quickly .

He is very correct regarding increases. As a retired retailer we had escalations of 10-12% one even 14% some 15 years back. This killed many a retailer in 5 years and is not sustainable. We moved premises umpteen times because of rentals. Once given notice then all of a sudden the landlord wants to negotiate. Too little too late.
We only had one bargain premises. We knew we were doing something wrong but never the less pissed the landlord off, he doubled our rent, it was still a bargain, were there for 15 years till the property was sold.

Some rents are insane.Loads of shops are empty and when you want to negotiate with the landord they’ll stick to their price, so it stays empty.

disgusting….these CEO’s all look like nazis

End of comments.

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