Retail Flashcards
What is the most important factor for utility and value in retail?
Frontage is more important than depth and exposure
How do you measure retail?
Gross Lettable Area Retail (GLAR) under PCA guidelines. API adopts IPMS standards but retail is yet to have an IPMS standard.
How is the GLAR measured?
Measured from internal surface of external walls, centre of common walls (excludes stair voids, areas less than 1.5m high and standard facilities in building)
How is direct comparison used in retail?
Rate per GLAR
How is capitalisation of rent income used for retail?
Value property on its estimated net future income, net market income is assumed to be in perpetuity, capitalised using a cap rate from comparable sales, allowance for vacancy
How is DCF used for retail?
Mainly only used for larger properties, forecasts over 10 years
Define retail premises under the Retail leases act 2003?
premises, or part of, used wholly or predominantly for the sale or hire of goods by retail or the retail provision of services
What are the exemptions of the Retail leases Act 2003?
Leases with occupancy costs over $1m a year
Any leases not on the first three storeys of the building
Leases with tenants list on ASX or subsidiary
Barristers chambers
Leases for terms of less than one year
Leases with terms of 15 years straight or more, where they impose substantial works or financial obligations
Council premises
Community or charitable purposes
Farming and agricultural purposes
Tenant is related party
How long should the minimum lease be under Retail leases act?
5 Years minimum (can include options for renewal)
What are the 5 prescribed methods for rent reviews?
Fixed percentage increase
Increase based off CPI
Fixed annual amounts
Current market rent
Basis/formula to be prescribed by regulation
Under the RLA (2003) what must landlords disclose?
Must provide a draft copy of the lease (at least 7 days prior to commencement)
Must provide retail leases information brochuer from office of Small Business Commissioner
Must provide disclosure statement (at least 7 days prior to commencement)
How long must the lessor give the lessee prior to terminating the lease?
6 months written notice
Can a landlord terminate a lease because turnover targets are not being met?
No
What are the 6 unrecoverable outgoings under RLA 2003?
Capital costs (Section 41)
Depreciation (Section 42)
Sinking fund contributions (Section 43)
Interest on landlords borrowings (section 44)
Land tax (section 50)
Legal costs and other expenses related to preparation of lease (section 51)
Are ratchet clauses allowed in retail leases?
No
When will old leases prior to the act come into effect?
The RLA (2003) will come into effect when the lease is renewed after 1 May 2003
What are the 3 obligations/requirements for landlords under RLA (2003)
Provide a prospective tenant with copy of proposed lease
Provide a disclosure statement and copy of the proposed leased seven days before entering into lease
Maintain in good repair the structures, fixtures, plant and equipments (except if the lease says the tenant is entitled or required to remove these items at the end of the term)
What is a market rental?
The estimated amount a premises should rent at the relevant date between a willing lessor and a willing lessee in an arms length transaction where both parties have acted knowledgeable, prudently and without compulsion, having regard to the usual market terms and conditions for leases of similar premises.
What are the standard methods for rent reviews (section 35 RLA)?
Fixed percentage, CPI, market review, fixed annual amount, basis or formula prescribed by regulations
What lease dates does the RLA apply to?
Leases commencing after 1 May 2003, leases before this will become subject to RLA once they are renewed
What is the CB cold storage case vs IMCC Group?
CB Cold Storage Pty Ltd vs IMCC Group
Supreme court applied the ‘ultimate consumer test’ - ultimate consumer does not have to be person who uses the goods or services to satisfy personal needs, but could also be another business that uses the goods or services for a business purpose, so long as they do not resupply them
A key part of this case was that the CB cold storage operated during normal business hours and retail users could work in during these hours and receive a service
What is the basic summary of the income approach? (step-by-step)
If tenanted, assess rent and whether this is at market (analyse car parks and amenities seperate)
Check recoverability of land tax under RLA - deduct from net rent if applicable
Analyse comparable sales to determine an appropriate cap rate
Capitalise net income using market cap rate, then add or subtract rent shortfall
If vacant possession, owner occupied or short lease term remaining, allow vacancy, let-up period including agents advertising and rent free period
Turner method step by step?
Gross Realisation (GST Inclusive)
LESS selling expenses (agent comm. marketing, legal fees and GST)
= Net Realisation
LESS profit and risk
= Funds available for development
LESS development costs
construction costs (incl prof fees)
holding costs (rates, taxes)
Interest on construction (1/2 development, 1/2 selling period)
= Funds available for purchase
LESS costs of purchase
interest on land (full lead in, full development, 1/2 selling period)
Legal costs
Stamp Duty
= Residual Value
What can a low yield indicate?
Capital growth asset
Rent below market
Strong lease (long lease term or good tenant)
New building
Zoning (good)
What can a high yield indicate?
Rent above market
short term lease
non-conforming use
specialised property (limited demand)
strata unit vs freehold (less attractive/less development potential)
zoning (poor)
risky location or tenant
From what date does the retail leases act apply?
To leases entered after 1 May 2003, anything prior to that becomes subject to it when it is reviewed after this date
How long must a landlord give to notice if a lease will not be renewed?
6 months written notice
What is section 37 of the Retail Leases Act 2003?
Rent reviews based on current market rent - market rent is between willing landlord and tenant in arms length.
The assessment is based on current market rent.
It will take into account the provisions of the lease
It is done on a vacant possession basis and for the same/similar use
It will not include the goodwill created by the tenants occupation or the fixtures and fittings
When looking at evidence, incentives will be taken into account
If the landlord and tenant do no agree on the rent amount it is to be undertaken by a specialist retail valuer with more than 5 years experience.
What is section 50 of the Retail Leases Act 2003?
Recovery of land tax - under the retail leases act land tax is not recoverable by the landlord
How to calculate equivalent market yield?
Market income/adjust sale price (adjusted means we allow for a profit/loss on rent, or if vacant, we adjust the price to reflect for agents costs, letting up period and incentives)
We ADD anything to sale price that COSTS money (agent fees, letting up, incentives, rental loss)
We DEDUCT anything to sale price that ADDS money (profit rent)
This shows us the “true value” as a purchaser will adjust their price for these things. So we do the opposite, in order to work backwards.
How did you arrive at a discount rate?
Takes into account risk, inflation and opportunity cost. 10-year bond rate of 4.2% + risk premium. Can also assess off the cash rate 4.35% and bank savings account. Just want to adopt a figure that represents the risk of the asset.
How do you get your cap rate?
Based off yields derived from sales evidence.
How did you get your outgoings?
Lease Agreement/Disclosure Statement - I used the lease where provided for things such as strata fees, otherwise having access to the statutory outgoings we are able to work out the rates, fire levy etc, and then we can estimate other things that we are confident with.
What are the main provisions of the RLA?
Lease term minimum of 5 years (including options)
Rent reviews based on 1 of 5 prescribed methods
No ratchet clauses
Landlord cannot recover land tax, loss of rent insurance, sinking fund contributions and depreciation
Landlord responsible for maintaining structure + fixtures
How would you value a retail premises with a residential property at the back?
Highest and best use first. Usually these are quite common so would look for similar sales as per usual. Get a rent for each and a total market income and then cap rates.
Otherwise could look at valuing each individually and adding together.
In your report how did you calculate your net effective rent? Did you make adjustments for land tax?
The net effective rent is used for rentals when we are analysing them to give our subject a rental. To calculate this we ammortize the incentive given over the lease term, we can then compare everything together on an even playing field. Land tax adjustments dont come in until we are looking at sales evidence. This is where we adopt a market income which is our net rent minus any non-recoverable outgoings such as land tax. We do this for our sales, there is no net effective calculation here. When getting our own figure for out property we get our net rent (effective or face) and then would take off land tax to arrive at our Net Income.
Bay Street, Port Melbourne
6.3% Vacancy (low, but higher than 2022)
$400-$600/sqm
Service Retail, Food and Beverage, Specialty Retail (fairly even)
Bridge Road, Richmond
10.7% Vacancy (been dropping)
$350-$500 sqm
Food and Beverage (main one)
Chapel Street, South Yarra
7.9% Vacancy (been dropping)
$550-$600 sqm
High Specialty Retail (fashion)
Church Street, Brighton
1.1% vacancy rate (very lot, pretty stable)
$900-$1200 sqm Leader in highest rental
High specialty retail and close with food and beverage
Glenferrie Road, Hawthorn
6.2% Vacancy (dropping)
$500-700 sqm
Lots of food and beverage
High Street, Armadale
2.3% vacancy (has been dropping)
$1100-$1200 sqm
Lots of specialty retail (fashion, boutiques)
Lygon Street, Carlton
6% vacancy
$650-$700 sqm
Lots of food and beverage
Any other RLA cases relating to cold storage you are familiar with?
There are multiple of these, one in particular i was informed about was a supplier that was supplying nuts and bolts to Ford, the car manufacturer. Because they were being used on the car and onsold to consumers they were considered to be a part of the RLA.
What are retail yields doing?
Prime strip retail are in good demand, and quality opportunities are taken up. More popular strips like Toorak road have seen some low yield sales around 2-3%, but in general most yields are in the 3%. Due to the current market we have been experiencing investors may be looking for something closer to 4% but strip shops are often seen as longer term investments.
What is included in a disclosure statement?
Term or duration of lease
Options for further terms
Occupancy costs
Tenants fit out requirements
Relocation or demolition clauses
