Revenue-Sharing vs. Fixed Rent: Which is Best for Landlords?

The retail leasing market in Singapore is evolving, and landlords are facing important decisions when it comes to choosing between revenue-sharing and fixed rent lease models. Both models have their advantages and disadvantages, and understanding these can help landlords make an informed choice for their properties. In this article, we’ll compare these two models, looking at their benefits and drawbacks, and how they align with current market conditions.
1. What is Revenue-Sharing Rent?
Revenue-sharing leases involve landlords receiving a percentage of the tenant’s sales, rather than a fixed monthly rent. This model is often used in industries where businesses are more susceptible to fluctuations in sales, such as retail and hospitality.
According to a PwC report, revenue-sharing agreements in Singapore have been gaining popularity, especially in times of economic uncertainty. This model offers flexibility for tenants, and in return, landlords share the risks and rewards of business performance.
For example, Frasers Property has seen success with revenue-sharing agreements in its retail spaces, especially in malls where foot traffic can vary seasonally. This approach allows businesses to align their rental payments with their revenue, reducing the strain during slower periods.
2. What is Fixed Rent?
On the other hand, fixed rent involves tenants paying a predetermined amount of rent regardless of how well their business performs. This is a more traditional leasing structure that provides landlords with predictable and stable cash flow.
A report by JLL highlighted that fixed rent leases still dominate in Singapore’s retail market, as many landlords value the certainty they offer. For instance, CapitaLand typically opts for fixed rents in its commercial properties, ensuring consistent revenue streams without being affected by tenant performance.
3. Revenue-Sharing: Benefits for Landlords
While it may seem like a riskier option for landlords, revenue-sharing leases can be beneficial in specific scenarios:
- Higher Potential Returns: If the tenant’s business performs exceptionally well, the landlord can earn more than they would with a fixed rent. For example, a popular retail outlet or a food court tenant can generate significant sales, boosting the landlord’s earnings.
- Stronger Tenant Relationships: Revenue-sharing can help foster stronger partnerships between landlords and tenants, as both parties have a vested interest in the success of the business. This can lead to better cooperation and long-term tenant retention.
- Flexibility During Tough Times: For tenants in sectors like hospitality or retail, revenue-sharing leases allow businesses to scale rent payments according to their performance. This can help landlords avoid vacancies during economic downturns.
4. Fixed Rent: Benefits for Landlords
Fixed rent, though less flexible, also offers several key advantages:
- Predictable Income: Fixed rent leases give landlords a stable and predictable cash flow, regardless of tenant sales performance. This is especially important for landlords with multiple properties or those with significant operating costs.
- Lower Risk: With fixed rent, landlords don’t need to worry about fluctuations in tenant revenue. This ensures a more secure return on investment, making it appealing for landlords who prioritize stability.
- Easier for Budgeting: Fixed rents make it easier for landlords to forecast earnings and manage finances, which is essential for property developers or those holding multiple properties.
5. Revenue Sharing vs. Fixed Rent: Which Model Works Best?
The choice between revenue-sharing and fixed rent depends largely on the nature of the retail business, the landlord’s investment strategy, and market conditions. In Singapore, both models have been successfully implemented in different contexts.
- For High-Traffic Locations: Revenue-sharing might be more attractive to landlords of malls or retail centers in high-traffic locations, where the potential for tenant sales is higher. For instance, landlords in the bustling Orchard Road area might find revenue-sharing leases more beneficial as tenants could generate substantial sales.
- For Stable, Low-Risk Investments: Fixed rent is likely a better fit for landlords with long-term holdings in stable, low-risk markets. For example, landlords of office spaces or locations in quieter suburban areas may prefer the predictability of fixed rents.
6. Market Trends in Singapore
According to Knight Frank, retail rental yields in Singapore have faced pressure in recent years, with landlords exploring flexible leasing models to remain competitive. While fixed rents still dominate the market, the rise of e-commerce and changing consumer habits have led to an increase in demand for more flexible lease arrangements, including revenue-sharing.
In fact, the Singapore Retailers Association reported that approximately 15% of retailers in Singapore are now working under some form of revenue-sharing lease, a significant increase over the past decade.
7. Which Option is Right for You?
Ultimately, the choice between revenue-sharing and fixed rent depends on the landlord’s objectives, the type of retail business, and the property’s location. If a landlord is willing to share risks and potentially earn more in good years, revenue-sharing could be a good fit. On the other hand, if stability and predictability are key priorities, fixed rent is a safer choice.
Singapore’s dynamic retail landscape continues to evolve, and understanding these leasing models is crucial for landlords looking to make the most of their retail properties. As the market adapts to new consumer trends and economic realities, landlords must stay flexible and be open to negotiating lease terms that benefit both parties.
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