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Breaking down Rental Yield of Shopping Centre Developers and understanding company performance

A commercial real estate developer’s portfolio is considered successful if it has a strong rental yield. This regularly produces high rental income with perennial demand for space in an area or province. Furthermore, the aspects such as maintenance and upkeep costs, occupancy rate, market value of the portfolio, types of tenants, lease expiration profile, tenant cost of occupancy (rent per sq. ft. to tenant sales per sq. ft.), demand and supply forces and the general state of a local real estate industry play a crucial part in defining the profitableness of a shopping centre developer.

Televisory analysed three shopping centre developers from Europe; Unibail-Rodamco (72 properties with 52.8 mm sq. ft. in central and western Europe), Kleppiere (166 properties with 67.6 mm sq. ft. across Europe, majorly in France) and Intu Properties (22 properties with 22.4 mm sq. ft. in the UK and Spain) on various operational and financial metrics including net rental yield, occupancy rate, tenant profile, development pipeline, revenue per sq. ft. and expenses per sq. ft.

The net rental yield (net rental yield is a function of rental income, net of core expenses and property market value) decreased consistently and was at the same level between 3.5-5% for all the three firms. The net rental yield was almost similar for the three companies as most of their portfolio mix was identical and spread mainly in France, Italy and Spain. This declined as rental income decreased across the three entities as shown below.

    

The revenue of Kleppiere was very different from the rest despite a minor difference in the rental yield. This was due to the recent acquisition of Corio and the company was yet to fully derive synergies from the merger. However, Intu had the lowest EBITDA margin owing to higher costs in comparison to revenue per sq. ft., while Unibail had the lowest costs per sq. ft. and fetched highest EBITDA margin among the three.

Moreover, rental income and costs are also affected by popularity and location of properties, this can be measured by footfalls, which in turn get converted into tenant sales. For instance, tenant sales per sq. ft. for Unibail grew by 4.1%, while for Kleppiere the growth was 4.4%. A consistent increase in tenant sales can translate into higher overage rent and, in turn, increase net rental income or revenue for developers. 

A high rise in tenant sales also helps in higher rental revisions. The rental revisions and reimbursements are dependent on lease renewals and tenant retention rate. Hence, except Unibail, other companies witnessed a decline in the increase of base minimum rent in their portfolio. Subsequently, both Kleppiere and Intu renewed leases at lower base rents to retain clients. However, revenue per sq. ft. remained consistent as these collected reimbursements and other recoveries from their tenants. Unibail, on the other hand, maintained quite higher rents for its premium brands and on average rentals from other tenants. Its maximum rent per sq. ft. was around Euro 79, while the weighted average was around Euro 45. Therefore, rent increase was not uniform across all tenants, thereby, ensuring a healthy increase in base minimum rent for the portfolio. 

The amount of rental revision is also dependent on tenant’s cost of occupancy, this is calculated as rent per sq. ft. to tenant sales per sq. ft. Tenants are generally willing to pay 12-14% of their sales towards rent. Thus, as tenant sales increases, rental revisions can be high, therefore, impacting revenue and profits positively. The three firms’ tenant cost of occupancy was consistently between 11-14%. However, Intu had a lower tenant cost of occupancy and this gives it a scope to revise its rental rates upwards in the future. 

Additionally, another factor that impact revenues are vacancy rates. A higher vacancy rate indicates loss of rental income and increased expense per sq. ft. as the company would incur fixed costs compulsory to maintain a property, whether occupied or not. The occupancy rates remained consistent for the three companies analysed and had little or no impact on revenue and fixed costs between 2012-16. 

The type and number of tenants play an important role in ensuring vacancy rates are not too high for a developer, for example, anchor tenants tend to contribute to the majority of revenue and the stability of such tenants is of major importance to a developer. Likewise, a developer can diversify its tenants among different industries so that a fall in an industry will not impact occupancy rates.

In addition to the above, future expansion plans and development pipeline play an important role to ensure consistent improvement for the future performance.

In the end, it can be stated that the operation of a shopping centre developer cannot be merely examined through the rental yield. An in-depth analysis of numerous factors is also needed as described above, in order to comprehend the accurate performance and functioning of a shopping centre developer.

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