There’s a clamour from retailers for government (you and me) to subsidise their shop rentals.
Justice Minister Andrew Little said, “We’ve heard the calls to subsidise rent or to freeze rents. However, both of these approaches would have meant commercial property owners would have had their income protected at a time when no-one else enjoys that privilege”.
That of course is true, however, Andrew should note no lessor is asking him to do that. Instead, I suspect I’d speak for most when I say they’d rather the government stayed out of interfering with clear contractual relationships. Let’s look at this in detail. First, there’s many types of retail property.
SHOPPING CENTRES
Shopping centres are mostly owned by public companies. They are dumb investments.
The smart money got out a few years ago as the evidence became increasingly clear they’re doomed, notably because of the growth in internet shopping. That said, some are still flourishing but trust me, within a decade they’ll be dead in the water in an age of rapid change, and worth only their land value.
That said, who owns their owners, as I said, most being public companies? Primarily their shareholders are investment Funds, providing retirement incomes for ordinary folk. Almost certainly major Government Funds such as the ACC for instance will be among their shareholders.
Managing a large shopping mall is a complex expert business. The placement of shops is a critical factor.
If for example one wanted to start a stamp and coin business, they would not entertain it. In short it’s not simply a matter of leasing vacant space but instead leasing it to the right activity and operator in the right position.
It’s part and parcel of managing a shopping centre to have tenants regularly in trouble for all sorts of reasons. A dress shop owner might buy the wrong designs, a mild winter will leave a retailer with unsold winter clothing and so it goes.
The Mall owner will then come to an arrangement with the tenant to nurse them through the crisis. This is an everyday part of managing a large shopping centre and does not need government involvement.
HIGH STREET RETAIL
Conventional High Street retail is doomed. The sole exception are prime CBD shops simply because of the large number of pedestrians.
My company owns the most CBD shops in Wellington because we own the most prime CBD office buildings.
Again, as with shopping centres there are constant situations arising in which retailers get into difficulty.
If it’s a one-off financial hit for some reason or other, we will suspend rent for say 3 months then spread its repayment, interest free, in small supplementary payments thereafter.
That in fact is precisely what we offered most of them long before the lockdown arose but when it was evident things were going to get tough.
The subsequent lockdown foolishness by the government and their wage subsidies, and now further payments under consideration, should not be seen as subsidising landlords, as Andrew Little has said. Landlords are well versed in dealing with retailer problems and don’t need the government’s intervention.
Aside from that, why pick on them? Why not demand the shoe shop’s suppliers provide stock at half price, so too the electricity supplier, the rating authority and so on? Politicians and public servants are not au fait with these issues and should stay out of it.
A final thought on prime CBD buildings is as with shopping centres most are owned by either public companies or Funds, their ultimate ownership beneficiaries being mum and dad superannuant savers.
These are the people hurt by unnecessary clumsy government intervention.
My company, is the largest NZ privately owned CBD building owner but we’re oddities outside of the capital. There’s a higher degree of private ownership in Wellington than any city I’m aware of in New Zealand, Australia, Britain etc. That’s because of misplaced earthquake concerns, but that’s another issue.
PROVINCIAL AND SUBURBAN SHOPS
These are invariably owned by mum and dad small investors. Investment is about trying to read the future. These owners are not investment sophisticates and will all ultimately get burned.
Currently half the world’s population live in cities. Projections are uniform worldwide that this will rise to 75% in another 25 yrs.
In its wake will be ghost towns full of empty shops. You can see that already when driving around New Zealand, but it’s the same situation globally.
Small investors are sucked in by the cheap entry price and high yield, both factors which should ring alarm bells.
But note this.
Our principal newspapers at least twice weekly run 2, 3 and sometimes more full pages display advertisements listing many dozens of small commercial and industrial buildings for sale. These days a high percentage are located in doomed provincial locations.
You will rarely see a main city offering and the exceptions are nearly always dogs. Top major investment buildings that come on the market are never advertised as there’s no need, commercial agents knowing who their buyers will be.
But also note this. Outside of the Sydney Morning Herald Saturday edition you will not find such advertising anywhere in the world. In short, the desire to own commercial property is a New Zealand peculiarity.
There are literally several hundred thousand commercial buildings in New Zealand. 99% of them represent bad investing and constantly declining value. That said, it’s a totally improper use of government money to prop them up.
My company both here and abroad were eligible for salary supplementation during the lockdown. We wouldn’t dream of taking it because we can afford not to, so too many of the parasite larger outfits the press have been exposing who joyfully put their hand up.
Conversely, we don’t want the government interfering in our handling of troubled retailers. We are well used to that. When trends change such as for example the now troubled dress shops, we release tenants from their obligation and don’t pursue them in such genuine hardship cases, notwithstanding personal guarantees.
FINAL THOUGHT
I bought my first retail building way back in 1962. Over the subsequent years I’ve owned over 1000 retail premises in over 50 cities in five countries.
There was a time when this was smart investing. It’s certainly not now.
But here’s the puzzle. Over those near six decades we’ve experienced heaps of occasions when lessees have sought rental reductions, sometimes backing such pleas with their accounts.
But never once in those six decades has a retailer come to us and said we’re doing an awful lot better than anticipated. Please can we have an increase in rent?
How do we handle these? Simple. We tell them if they can’t crack it then see a commercial leasing agent who will find a replacement lessee, as provided for in their lease.
I say it again. The government’s unfamiliarity with the commercial world has seen them make some hugely unwise steps, splashing money around willy-nilly.
There will be a time of reckoning for them and the nation and it doesn’t auger well.