Shopping Centre Council rejects idea of retail tenancy code of conduct

The Shopping Centre Council of Australia has rejected suggestions it might sign up to a voluntary Retail Tenancy Code of Conduct, and has launched a spirited defence of shopping centre rents in Australia.

Responding to a story on SmartCompany yesterday about the Franchising Council of Australia’s push for a code of conduct, the body representing shopping centre owners and managers says it’s wrong to suggest that tenants have been slugged with excessive rents.

Rather, SCA executive director Milton Cockburn says there are many shopping centres where rent reductions are occurring and help is being offered to tenants.

“The SCC will not be entering into discussions with the Franchise Council on any code of conduct,” Cockburn says.

“No shopping centre will talk to them about this.”

The FCA yesterday said a voluntary code for landlords, tenants or representative organisations had been drafted to address member concerns over the “extreme behaviour that occurs far too frequently.”

The concerns raised by the FCA include excessive rent increases and unreasonable behaviour in relation to end-of-term arrangements for sitting tenants.

The FCA, which represents both franchisors and franchisees, adds that the SCC has previously expressed an open mind on a code of conduct.

But Cockburn says shopping centres already operate under myriad state and territory laws, and it would not support a code of conduct “over and above” existing regulations.

He suggests FCA’s push for a code of conduct has been driven by a desire to deflect from recent problems in the franchising industry.

“It’s a common tactic under the FCA that when they’re in trouble they’ll attempt to divert attention,” Cockburn says.

Cockburn also says that tenants would be better placed if the FCA was willing to slice fees.

“Given the franchise fees, it’s no wonder some are struggling,” Cockburn says.

In its 2007 submission to the Productivity Commission inquiry into the retail tenancy market, SCC says FCA’s argument that landlords should reduce rates means that “investors in retail property (primarily people saving for or living out their retirement) should accept a lesser return from their investment in order to subsidise franchisors’ business models and profits.”

“While the FCA is very voluble on the subject of rents and rent increases, arguing for additional regulation, it remains remarkably silent on the subject of the level of franchise fees and whether there is a need for regulation of these fees,” it adds.

“It is also a strong opponent of legislation regulating the franchise-franchisee relationship, relying instead on a code of practice, which provides franchisees with nowhere near the same level of protection as lessees receive under retail tenancy legislation.”

The Shopping Centre Council’s submission to the Productivity Commission’s inquiry into the retail sector this year states that from 1996 to 2010, the “growth in rents for specialty shops in shopping centres has generally been in line with the growth of retailers’ turnover.”

“It is only in the past few years (and only for regional and sub-regional shopping centres, not for neighbourhood centres) that occupancy cost ratios have increased. This reflects the fact that most retail leases provide for annual fixed rent increases and these have occurred during periods when retail sales increases have been static or smaller than previous years,” the submission says.

The SCC also cited a study it commissioned in 2009 by retail consultant Michael Baker that found for regional shopping centres average occupancy cost ratios are around 3.5 percentage points higher in Australia than in the US, and three percentage points higher for neighbourhood shopping centres.

“The major explanation for this discrepancy between the two countries is the much higher retail space per capita in the US compared to Australia,” the submission says.

“Attention is often focused on the differential between the two countries in occupancy costs despite the fact that the general differential is only around three to 3.5 percentage points and, in the Westfield comparison, is much lower.”

“Little attention is given to the other side of the coin – that the sales productivity of Australian shopping centres is nearly double that of US centres.”

But the FCA has rejected suggestions the code of conduct idea is a diversion, and says the SCC’s fiery response will not curb its enthusiasm.

“Ask any retailer – retail tenancy is not a diversion, but is the most critical issue in current economic climate,” the FCA says.

“We don’t expect that the SCA will willingly come to the party, but when faced with the weight of evidence and weight of support this initiative is likely to generate, they will likely face the reality that changes need to occur in some areas. The facts speak for themselves. We look forward to ongoing dialogue with the SCC.”

Morgan Stanley last month concluded that “in all categories it costs Australian retailers more per square metres than offshore retailers.”

It also said that rent accounts for between 2% and 20% of total operating costs, driven by:

• Retail zoning laws that are relatively more rigid in Australian compared to the rest of the world.
• The landlord market is more consolidated that elsewhere in the world (with Westfield now operating most of the largest shopping malls in Australia).
• Australian macro-economic conditions have been solid for over 20 years, so vacancies haven’t been an issue – and in fact retail vacancies are about the lowest in the world in Australia.
• Store based retailers have been slow to embark on their own internet strategies, so demand for new stores has been healthy.
• Sales densities for the Australian retailers are generally higher than their US counterparts.