A new value model for a shopping centre

The project was developed during a period of accelerated change in the operating conditions of shopping centres. The growth of online sales, changes in consumer behaviour and restrictions on bricks-and-mortar trade during the pandemic increased pressure on the traditional business model based primarily on leasing space.

The financing of shopping centres rests to a large extent on a property's ability to generate stable cash flows. Banks assess in this respect the structure and durability of rental income, operating costs, the quality of the tenant portfolio, the level of debt and the owner's ability to service its obligations on time.

A signed lease, however, is not the same as cash received. A tenant's ability to pay rent depends on the results of its business, its liquidity, its cost structure and its access to financing — both at the level of a single unit and of the whole company or group.

Tenants' difficulties can therefore pass on to property owners, and then to financing institutions. This mechanism became particularly visible during the pandemic, when restrictions on trading reduced footfall at centres and the revenues of some tenants, leading to rent renegotiations, restructurings of operations and, in some cases, insolvencies and the termination of leases.

The deterioration in tenants' condition increased the pressure on property owners' cash flows and, in some cases, on their ability to service debt. For financing institutions this meant higher credit risk and a potential need to increase expected credit loss provisions, depending on the assessment of individual exposures.

The situation also highlighted the importance of competencies going beyond standard lease management — in particular in restructuring relationships with tenants, limiting the risk of their insolvency and rebuilding a property's economic resilience.

Guiding idea

The project did not start with the question of what to do with empty space. It started with the question of how a shopping centre can create value more broadly than by providing square metres — and what conditions it would have to meet to strengthen its economic position and its credibility with financing institutions.

The shopping centre was analysed from two complementary perspectives: that of the customer and tenant, and that of the equity owner and financing institution.

The first concerned the commercial attractiveness of the site, its competitiveness, its ability to attract customers and its potential to support tenants' sales.

The second focused on the economics of the property: the structure and stability of revenue, operating costs, the quality of the tenant portfolio, the level of risk and the ability to generate cash flows sufficient to service financial obligations.

The conceptual analysis covered the rent structure, potential sources of additional revenue, the use of space and logistics facilities, energy costs, technological possibilities and the integration of bricks-and-mortar retail with online sales.

We also examined the relationships between tenants' financial condition, the owner's income, the property's operating profitability and its credit profile.

The architecture of interests

A shopping centre's tenant base is not uniform. It includes individual retailers, chains managing their own stores, businesses operating within franchise systems and large strategic tenants, often acting as traffic generators.

The individual groups differ in business model, scale of operations, financing options, negotiating strength and lease terms.

Strategic tenants may benefit from preferential rent terms because of their importance for footfall and the attractiveness of the site. The economic justification for such terms should, however, be assessed in the context of the whole lease portfolio and each tenant's impact on the centre's revenues and costs.

Franchise structures add further complexity: the party to the lease may be the franchisee, the franchisor or another group entity. Depending on the structure adopted, the scope of financial and operational responsibility of each party may differ.

The properties themselves may also operate within larger investment portfolios and capital structures, which affects investment decisions and the way they are financed.

The project therefore had to take into account the interests of:

• Tenants: individual retailers, chains, franchisees, franchisors and strategic tenants.
• Owners and investors: responsible for the profitability, value and long-term development of the property.
• Property managers: responsible for commercialisation, operation and relationships with tenants.
• Financing institutions: assessing credit risk, cash flows, collateral and the ability to service debt.
• The legal and regulatory environment: including, among other things, trading restrictions and the rules governing restructuring and insolvency proceedings.

The diagnosis was sectoral and conceptual in nature. It was not a financial audit of a specific shopping centre.

Conclusion from the diagnosis

The economic value of a property does not depend solely on the number of signed leases, but on the quality and durability of the cash flows it generates, the level of costs, the risk structure and the ability to remain competitive in a changing environment.

The future model of a shopping centre is worth assessing at the same time from the perspective of the customer, the tenant, the property owner and the financing institution.

A signed lease is not yet a realised cash flow, and a site's attractiveness does not derive solely from the amount of space available.

Developing additional sources of revenue, optimising costs, integrating sales channels and actively managing tenant risk can increase a property's economic resilience and create a basis for improving its long-term competitiveness.

This does not, however, mean an automatic increase in the site's value or an improvement in its credit profile. The real effects depend on the profitability of the proposed solutions, the stability of cash flows, the level of risk and the organisation's ability to implement them.

The project made it possible to organise the links between the retail model, tenants' operations, the economics of the property and its financing. It also indicated which assumptions would have to be verified before investment decisions are taken.