COVID-19 SPECIAL

Consider charging tenants a share of income instead of fixed rent

Associate Professor Chu Junhong says mall landlords and tenants should work together to face the challenges.
Associate Professor Chu Junhong says mall landlords and tenants should work together to face the challenges.
Ms Christine Li says landlords could focus on understanding tenants’ hardship and providing some flexibility.
Ms Christine Li says landlords could focus on understanding tenants’ hardship and providing some flexibility.

Instead of fixed monthly rents, landlords can charge tenants based on their gross turnovers (GTOs) during this downturn and earn themselves some goodwill.

This can be done by offering dual components of reduced rent and a portion of GTO, or full payment that is entirely based on GTO.

For instance, a restaurant which has to pay $10,000 in monthly rental can be offered a 50 per cent rent discount in return for a 5 per cent or 10 per cent share of its monthly takings.

Another way is for the restaurant to offer up to 30 per cent of its takings in lieu of paying its usual monthly rent.

Property consultants such as Ms Christine Li say such arrangements will impact the income of landlords. But it is imperative for landlords and tenants to work closely together for survival because the hardship from the Covid-19 pandemic is expected to be prolonged.

While countries are gradually reopening their economies after periods of lockdown, it is likely to take many more months before tourists start to flock to Singapore again.

Also, the experience from China, one of the first countries to reopen, shows that apart from the initial "revenge spending" when the lockdown ended, many consumers are still reluctant to head out to spend for a number of reasons, including fear of infection and rising unemployment.

Ms Li, Cushman & Wakefield's head of research for Singapore and South-east Asia, says that in these uncertain times, landlords should be mindful that if their current tenants leave, it may not be easy to find replacement tenants.

"As the Covid-19 pandemic is likely to be long-drawn, landlords should not alienate or lose important anchor tenants or other key tenants, who may have long-term leases and who may not be easily replaced," she says.

So landlords' immediate focus could be on understanding tenants' hardship and providing some flexibility, such as an alternative rental model under a re-contract, or a tweak to the existing contract.

Big landlords are likely to be able to weather this storm better than their tenants. But they, too, have been severely hit by the pandemic because they have to spend a lot more on enforcing safe distancing measures as well as cleaning their premises more regularly.

 
 
 

With the economy in the doldrums, the overall rental market is expected to ease too.

Ms Li expects prime rents to fall across the board this year, given an impending recession. Those in the Orchard and city areas will see the largest impact as restrictions on tourists are likely to persist. But suburban malls are expected to show the most resilience as consumers will still carry on with necessity shopping.

Given that landlords also have their hands full, tenants can also do more to adapt to the new normal of retail, such as through an omni-channel strategy and increasing their online presence.

Ms Li says some tenants might also have been complacent when times were good. Some might not have had a very robust online strategy when Covid-19 hit and so they have been unable to adapt to the new way of doing business and hence are suffering a significant loss in revenue.

"This outbreak serves as a wake-up call for them to embrace digital transformation and think of a long-term solution to ensure the business model is still sound under the new normal. This will include re-pricing some of the services and expanding one's digital sales channels and consolidating one's products and offerings," she says.

Agreeing, Associate Professor Chu Junhong, from the department of marketing at the National University of Singapore Business School, says food outlets need to be adaptable and innovate in their products or sales channels.

Instead of just offering their usual fares, they can consider doing special sets at prices that may attract professionals who are working from home.

Even those that normally do not offer takeaway meals can be innovative to stay in business.

"An example is Haidilao Hot Pot, which created 'an xin ti, a self-pick up hot pot with free pot rental, and "kai fan le", which means nearly done dishes, or quick-to-prepare dishes that can be ordered either through its own restaurant or food delivery platforms," says Prof Chu.

The New York Times recently reported that New Yorkers have started an initiative called SaveNYCEats to consolidate support for many restaurants that have closed or are struggling to remain open.

 
 
 

There, restaurants offer special meals that are usually listed for charity auctions in normal times. For instance, Ed's Lobster Bar has posted a special four-course takeaway dinner, as well as a seafood dinner for six prepared in your home by a team after social distancing curbs have been loosened.

There are online classes from Joe Coffee Company and Jonah Miller of Huertas, while Scarpetta will arrange pasta-making classes when it is allowed to reopen.

Some restaurants offer discounted gift cards.

"Covid-19 has created havoc on nearly everything and everyone. It's a challenging time for nearly all businesses, big and small. Both shopping mall landlords and tenants are badly hit, but they should work together to face the challenges," Prof Chu says.

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A version of this article appeared in the print edition of The Sunday Times on June 07, 2020, with the headline 'Consider charging tenants a share of income instead of fixed rent'. Subscribe