June 14, 2013
If you are considering renting a retail brick and mortar outlet, be it in F&B or fashion, do read this guide co-written by myself and retail leasing specialist Eddy Ong (his contact details can be found at the end). This guide was written in the context of Singapore in general, but certain details might vary from country to country.
As a start up, it is important for Landlord to support your new concept or your new brand name. This comes with the confidence of your products/services offerings backed up by good market research. Good locations, especially shopping malls, in Singapore will have many brand names applying, so you need to give the landlord a reason to pick YOUR brand. Shophouses typically just go with whoever can pay the higher rent with no preference to whom it leases to.
Also, it is important to have good, supportive landlords like Capitamall that will spend adequate amounts on advertising and promoting their location to ensure continuous traffic, and also to support you in any way. The downside is that good management places will come with it higher rental rates for their credibility and support. Still, it is more worthwhile to invest in a credible landlord than someone who just collects your rent then leaves you to fend for yourself.
Rental always occupies a high component of expenses in the SME’s profit and loss. It is always prudent to take up a space with reasonable or sustainable rental. Work out your rental budget carefully with a projected sales figure for the location. As retail real estate is expensive in small sized Singapore, it is imperative for new startups to find the optimal size of their operation needs. Good locations cost more, and more space = more rental to be paid. Also, larger spaces tend to have lower Per Square Feet (PSF) prices as compared to small spaces relatively. For a start, observe the space needed from competitor or similar businesses. As a guide, your rent should not be more than 20-25% of your monthly sales revenue for a viable business.
My personal experience is that it is more worth it to pay reasonably high rental, for high traffic locations, as compared to low traffic, cheap locations. But you need to be aware if a landlord is overcharging, even with the high traffic. Again, it depends business to business, but generally applies to mass market, high volume products/services, because for a cheap location you are going to spend more on advertising instead for awareness, which is a lot tougher.
It is not uncommon nowadays for BIG retail landlords to accept a GTO rental structure, that is, a percent of your monthly sales goes towards rent. This is tracked via the mall-linked point-of-sales system. It is usually 1-3% of the monthly rental that is tapped on the monthly sales as a variable rent component. Or alternatively, the landlord could ask for pure GTO rent like 25% of monthly sales. This is not as common in Singapore, as it is more secure for REIT linked malls to have stable rental income.
Retail outlets construction timelines are fluid. Newly constructed malls or shophouses will give more preparation time, while a floor zone revamp in the mall, with a moving timeline, or a tenant replacement prior to lease expiry gives a shorter timeline. Allocate ample time for preparation of at least 2 months (a little more for shopping malls, as they need to review your design) before start of construction, lest you risk your rental period starting before you even finish constructing your store. Make sure your contractor has a penalty for bypassing the stated construction deadline.
Landlord often ask for M&E provisions needed for your space. As a boss, you need to know your business equipments electrical power needs. Furthermore, mechanical provisions may refer to water points needed, floor traps locations, exhaust capacity or any other requirement like air-conditioning. Some F&B businesses for example, may require an exhaust for frying, while others do not. Know what your business requires before going into a locaiton.
After securing a lease, you will have to find designers/contractors for renovation or fit-out phase. It will be good if you have an in-house design and build contractor to work with the tenancy-development control team of the centre management (for shopping malls). Most proper landlords would want their tenants to renovate their premises in-line to their proposed concept as well as the property image (ignore if you are building a store in Geylang).
Consider using designers/contractors who have experience in your desired store, as they can advise what materials will be more durable, cost-effective or pleasant looking. Also, you might want to pay for ‘project-management’, where there will be a allocated project manager to make sure everything is constructed to specs and timeline is followed.
Special note: So far the only mall in Singapore (that I am aware of) that specifies you must use their appointed designer/contractor from a list is Jurong Point Mall. There is also a specific amount that you have to spend on renovation PSF of area, depending on the type and size of your outlet.
Their intent is to ensure a high design quality of all the stores in their mall, by ensuring you spend adequately. The fallacy is that only by spending more, can you ensure a good store design, which is false. With a good interior designer, it is possible to lower fixture costs yet still look good. So be very wary when dealing with this mall if you have a low budget.
There are general no pre-termination clauses in the retail tenancycontracts. Therefore, it is important to plan your business, viability and exit route in line with the lease term of the space proposed.
Typically 2-3 years contract with an option to renew is signed. under
exceptionally cases, 1 year lease is signed. It is possible to exit earlier by expressing your desire to vacate to the landlord, thereupon they will start looking for a replacement for your location.
They are however, under no obligation to let you vacate earlier based on contract. Instances of tenants just packing up and leaving have occurred, but your rental deposit will be forfeited and your company being subjected to a legal suit. Some malls will require you sign a personal indemnity where they can bring your personal assets under litigation as well.
It is very important to understand all the clauses under the lease agreement or letter-of-offer (LOO) that is to be signed. It is best that you have a legal representative to explain the terms and conditions with its implications to business owners. Do not sign blindly.
If you have budget constraints, you may engage a retail leasing specialist, like Eddy Ong (contact is below), to explain the terms and conditions of the lease agreement as well. This is purely to protect your legal interest and rights against the giant landlord.
Related Guide: 6 Qualities to Look for in a Good Singapore Property Agent
*State you’re from Sethlui.com for extra priority service!
Opening a new F&B business? Get personalized F&B consultation to save thousands on setup, and earn thousands more after opening.