Colliers International’s latest research entitled: ‘The real cost of setting up shop’ looks at the varying nature of occupancy costs in retail locations across key European markets. The findings demonstrate that retailers are ultimately most influenced by the potential profitability of a site than the occupational cost, meaning that in the case of high profile retailing cities such as London, Paris and Milan, which can guarantee high footfall levels and retail spend, retailers are willing to shoulder higher tax burdens in return for potentially higher profitability.
Paul Souber, head of retail agency, Colliers International, explains: “It is clear that retailers consider total occupancy costs relative to the actual and potential amount shoppers spend in a specific market, in order to focus on where they can derive the best value from their physical retail presence in relation to cost. So, despite the high occupancy costs incurred by retailers in key tourist and business cities such as London - which was the world’s most visited city in 2015, generating a total annual spend by international tourists of over US$20 billion - it remains the top destination of choice for international retailers, given the potential for high volumes of retail spending.
“When comparing competing locations, the property industry tends to look at rental levels while retailers consider total occupancy cost – the true annual bill for ‘setting up shop’. Retailers, however, also consider the flip-side of this cost; the actual and potential amount shoppers spend in a specific market. In essence, they focus on value in relation to cost. As such, many retailers consider that having a presence in a particular key market generates value in itself, courtesy of improved branding and visibility, despite the lower localised profits and high cost base. While this might be the case for the mainstream fashion brands, however, high occupancy costs can be a serious obstacle for other retailers.”
Colliers’ report shows that occupancy costs are being driven up by local taxes, yet these taxes differ widely from country to country. In Russia, for example, sales tax on rents are charged at 18 per cent, compared to 27 per cent in Hungary.
“Since September 1 in Poland there is a new retail sales tax, which will raise the cost of retail chains operation. On one hand it is expected that the tax will slow down the processes of expansion and consolidation of retail chains, on the other however it could accelerate the restructuring and multi-channel sales as well as sales automation (the tax does not cover internet sales). In the long term, the new tax will certainly have an impact on the financial results of retail chains and the performance of shopping centres in Poland”, said Katarzyna Michnikowska, Senior Analyst, Research and Consultancy Services, Colliers International.
Depending on the market, additional occupancy costs that need to be taken into account by the retailer include the service charge, marketing fee, VAT, property tax, other taxes, contents insurance, lease registration costs, deposit and/or bank guarantee and so called ‘key money’ – a premium that must be paid to take control of an existing lease in some markets.
Paul Souber continues: “In some markets, the percentage of total occupancy costs made up by these additional costs is startling, so it is clear that retailers need to consider many factors before embarking on building a retail operation in a new market. In addition to the large number of local taxes that need to be factored in, retailers also need to consider: labour costs, which make up a major chunk of retail operational expenses; the lease structure; and, the degree of flexibility of occupancy, which can all differ significantly from market to market.
“In any location, it is the profitability metric which retailers are ultimately guided by. In terms of total retail occupancy cost, it would be interesting to see where rents in cities with high occupancy costs would rise to, if they were freed of the burden of additional local costs and taxes.”