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A UNITED EUROPE REMAINS DIVIDED OVERLEASES

By Susan Thorne

Leases in the United Kingdom can run for as long as 25 years.

Though the European shopping center industry is increasingly international, national differences still create challenges, not the least of which involve leasing.

Because of differing national legal and real estate systems, shopping center retailers and developers confront very different leasing practices when they cross borders to operate in another country. This clash of cultures is becoming increasingly significant as retailers expand outside their own countries, and the issue arose at three seminars during ICSC’s European Conference in Monte Carlo, Monaco, this past April.

Each European country has its own distinctive retail leasing practices and history. Though lease-related legislation is brand new in some of the East European states, such as Poland, it dates back to the 1950s in Belgium and France. The term or length of leases ranges from as little as three years in Romania to the 20- or 25-year terms of some U.K. and Irish rental agreements.

Leases vary in security of tenure and in renewal and review procedures, as well as in the way rent is calculated. France, for example, has something called the droit d’entreé, a one-time additional payment (usually equivalent to one year’s rent) that tenants pay at the start of a new lease. Similarly, in southern Europe landlords often demand “key money,” an up-front payment to secure a place in a particular shopping center.

“Europe’s real estate culture is still very national,” observed Alfons Schouten, vice president of retail at Mexx Group, Voorschoten, the Netherlands. There is a world of difference, he said, between the Netherlands’ five-year leases and the United Kingdom’s old habit of 25-year terms, or between the straightforward base rent in such malls as Centro in Oberhausen, Germany, and the up-front surcharges required at leading shopping centers in Paris. And leases don’t just differ from country to country, Schouten observed. “Each manager is different.”

Retailers would really prefer not to deal with leasing issues when planning international expansions.

“The first job of a retailer is to sell things, not to think about lease contracts,” said Thibaut Castarède, development manager at Paris-based international cosmetics and perfume retailer Sephora.

But as much as they’d like to ignore it, leasing is a critical issue. A retailer moving into Britain, for instance, might be banking a little too much on its success signing a 25-year lease before it has tested the waters.

British mall developer Hammerson fears that leasing disparities could deter potential foreign tenants; it is taking steps to make the terms more friendly. The long lease term required by most U.K. shopping centers is the sticking point, said Sheila King, director of retail leasing for London-based Hammerson UK Properties, which has 20 shopping centers in the United Kingdom, France and Germany.

“When foreign retailers investigate tenancy in a U.K. mall, trying to negotiate a 15-year lease is always an obstacle,” King said. “They’re not sure what sales they’ll have, and they’re worried about how things will work out.”

To streamline leasing and encourage expansion-minded retailers, Hammerson recently announced a new “try us out” rental arrangement that reduces some of the risk to the retailer by offering a shorter lease term. Called Onestep, the concept permits retailers to take space in any of Hammerson’s continental European or U.K. malls for as little as two years, in exchange for a set quarterly rent. In this way, retailers can spend a trial period in a Hammerson center with their fixed costs capped and without being locked into a long-term lease. A conventional property lease can be negotiated at the end of the initial two years.

The concept, which was launched in April, is intended to cut across national fiscal and legal differences and simplify lease arrangements while reducing the cost to the retailer of opening in a new country.

Onestep is not so much a prescribed formula as a flexible arrangement. Tenants can opt for a lease term longer than two years, for example.

“It might end up being three or five years,” King said. “It will depend on the particular retailer.”

Hammerson strives to consult closely with would-be tenants to help them identify their optimum lease conditions, she explained. “It’s no good doing this if the retailers won’t be successful. We will take the time needed to make sure the lease will work. The tenants all want that, and we want that.” Onestep is a significant departure from leasing norms in Britain and underscores the importance of cross-border retail for shopping centers. Non-British retailers represent a very small but growing proportion of the total Hammerson tenant mix, according to King, and they are valued for bringing fresh concepts and brands to the company’s malls.

“We want to have more variety,” she said. “They bring new ideas, and I think everybody learns from each other when you have them there.”

The same Onestep conditions would apply for American retailers investigating the U.K. market as for European ones. Though such companies as Eddie Bauer, Gap and Talbots are well established in England now, King stresses that these kinds of transatlantic moves are a long-term venture. “It takes time to get to know your market,” she said. “It takes years.”

Reaction to Onestep has been positive, with several expressions of interest from retailers. As many as five new Onestep leases could be signed by the end of this year, King predicted.

But though Hammerson’s program appears to remedy one problem, a short lease term may not be feasible for many retailers, opined Jordi Casellas, international regional director at World Retail Consulting, Milan, Italy, a company that assists retail franchisors that are expanding internationally. Casellas says that short leases may be most attractive to such multinational high-fashion retailers as Gucci or Versace — companies that have large sales volumes and use a short-term presence in a new country as an opportunity to promote their brands. For these retailers, the cost of going into a new market in this way “is more like an advertisement or image investment than a retailer investment,” Casellas noted. But a short lease might be less attractive to the average retailer faced with substantial expenditures on fittings, structure and marketing.

“Most tenants hope to recover their investment [in a new market] in three, five or even 10 years,” he said. “We normally recommend that retailers not accept a contract that is shorter than their financing term.”

For their part, Mexx’s Schouten and Sephora’s Castarède say they see potential in the short-term lease principle.

“It’s a good beginning to encourage retailers to come into their country,” said Castarède, although he suggests that mall and Main Street landlords could go even further. One helpful leasing measure would be to lower or eliminate base rent for new foreign entrants in the first years and charge percentage rent instead. This would reduce the tenant’s financial exposure in those high-risk, high-cost, first months in a new market, he said.

Schouten suggests that a Onestep-type arrangement could be advantageous for the retailer going into a newly developed, unproven mall in a foreign market, where the mall’s potential may be difficult to assess. He says he would like to see more guarantees of mall promotion and advertising written into leases, so that tenants can feel confident of a new mall’s prospects for success.

Retailers are not the only ones, of course, who find themselves having to confront alien leasing practices; shopping center developers that are expanding overseas do, too.

“Leasing is still very much a local matter,” said Scott Abbey, director of retail properties at Rodamco Europe, Rotterdam, the Netherlands. “We have a Spanish team that leases our Spanish malls and a Swedish team for Sweden, and so on.”

And that’s the way it is likely to remain for the foreseeable future, say experts, despite Europe’s efforts to unify the economies of its members.

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