In today's tough retail climate, a flexible approach with tenants can minimise the void rate and deliver long-term value. But each case must be rigorously assessed. Helen Gordon reports

In today's economic climate, where we have already seen a number of household names leave the UK's high streets, pressure is increasing on landlords to maintain occupancy levels within their portfolios in order to try to preserve their income streams going forward.

Increasingly, a greater emphasis has been placed on the strength and sustainability of rental income, particularly in relation to the maintenance of a low void rate, as a measure of a property company's durability through the downturn.

In the current climate, landlords can no longer just sit back, safe in the knowledge that major retail occupiers will deliver a constant revenue stream and agree to upward only clauses at rent review, because, as has been evident from recent events, even the names we once thought would provide an almost guaranteed income are feeling the pain as much as the next retailer.

The British Property Federation (BPF) and British Retail Consortium (BRC) have debated hard the potential methods by which landlords can help tenants through the current market malaise. But if this is going to work in practice and, more importantly, obtain the genuine buy-in from landlords, the expectations of those landlords' investors have to be both acknowledged and incorporated into the solution.

Ultimately, landlords have dual obligations - on the one hand they need to address, where possible, the pressures placed on their tenants to protect revenue and maintain relationships, but on the other, recognise that their investors expect a certain level of performance from their capital. There is, therefore, a balance to be struck.

Tenants approaching landlords with requests for rent holidays, concessions or reductions are by now a familiar story to major property owners and there has been much debate surrounding the wisdom of agreeing to such concessions in light of the impact that they may have on the returns that landlords' portfolios can hope to generate for investors over the longer term.

In reality, then, these solutions need to be tailored according to specific circumstances. Given the sheer diversity of the UK retail tenant base, there can be no ‘one size fits all' answer. By assessing each case on an individual basis, landlords can strike the appropriate balance between their obligations to deliver value to investors and to provide support to tenants during an unprecedented period of economic turbulence.

These solutions can take a number of different forms - whether it is rent payment adjustments, a move to monthly rental payments, additional concessions, capital contributions to unit fit-out or deploying in-house resources (absorbing legal and agency costs) to market space that a tenant no longer needs, or can no longer justify operating.

Alternative solutions can also be implemented on a more interim basis. There have been a number of recent examples of landlords granting a new tenancy outside of the standard Security of Tenure provisions for a short term, often at subsidised rents, which can provide some additional flexibility, particularly in instances where a tenant is in the process of vacating or surrendering an existing unit.

The benefits of this approach are that the lights stay on and landlords avoid the burden of expensive empty rates duties in the short term, while retaining the opportunity to renegotiate better terms as market conditions improve.

Although the initial reduction in rental income might appear difficult to swallow when compared with potential void costs and incentive packages, it may work out to be the more attractive option for the investor if the only other one is for the unit to be immediately vacated without the certainty of a replacement already confirmed.

In 2006, we agreed a temporary rent reduction for one of our retail tenants. The 15-month reduction period allowed the retailer in question to reinvest the funds saved on rental back into its store offerings, to and increase trade to a profitable level.
This improvement in performance had the additional benefit of making it a more attractive investment proposition in its own right, and it was subsequently sold to one of its major international competitors, which then continued to operate the store at an increased rental level.

In other cases, though, it can be more prudent not to grant financial assistance, either because a tenant's business case is not solid enough, or because demand exists from other parties for the unit in question. This is where it is essential to have the expertise and resource in-house to ensure that assessment of these requests is rapid and thorough, which in turn affords the landlord a degree of flexibility when deciding on the optimal approach.

Property managers should take an overarching and holistic view of issues affecting tenants across the full spectrum of property asset classes. If a tenant is regarded as being under pressure, the portfolio manager must identify and implement the most appropriate solution quickly and effectively, which could either result in the agreement of the tenant continuing to trade or set out a resolution whereby the unit can be re-let on more favourable terms, or to a covenant with a greater degree of security.

Addressing the needs of tenants will pay dividends. Innovative solutions to avert void units being created, should maintain the void rate at a below benchmark level.

Furthermore, property managers must continue to pay close attention to the effect that any fluctuation of this rate, irrespective of how small it may be, could have on their ability to meet the promises made to their investors.

Those who strike the balance between constructive and empathetic ownership and diligent and prudent portfolio management will be first in line for investor funds when market conditions improve.