‘You are worth more to the landlord.’


Because pharmacies have been so resilient in the face of the COVID-19 pandemic, landlords will be eyeing them seeking value

Speaking at the Australian Pharmacy Professional conference on the Gold Coast over the weekend, Lease 1 director Phil Chapman and Guild Group Executive Health Economics’ Philip Chindamo took delegates through the impact of COVID-19 on pharmacy rentals.

The session included key takeouts from the Guild’s Rental Report.

Starting from the extraordinary events of March 2020, the pair explained how COVID-19 impacted pharmacies, with Mr Chindarmo highlighting the sales spike that month.

There was a 30% year-on-year growth in March 2020 in terms of pharmacy sales, while the rest of retail grew only 10%, he said: the action didn’t take place in supermarket aisles, but in pharmacies.

“That’s unprecedented,” he said, noting that since then, spending in pharmacy had dropped, followed by “tepid” growth within the sector.

Phil Chapman noted that some pharmacies, particularly those in CBD areas, are likely to continue to experience difficulty for some time.

“Certainly tourist areas are starting to come back a little bit better,” he said, with the caveat that this did not necessarily extend to areas which had been heavily reliant on international tourism.

But overall, throughout COVID-19, pharmacy proved how resilient it was as a sector, he said – second only to supermarkets.

“That’s taken landlords to a place where they’re now looking at recovering asset value.”

Shopping centres were hard hit by the pandemic, with Westfield alone posting a $3 billion loss.

But it’s not only the large shopping centres which house about 20% of the pharmacy sector which may be looking with interest at the value they can gain from resilient channels: smaller landlords, over time, have become more sophisticated as well.

A small shift in capitalisation rates means pharmacies are looking more attractive to landlords: this rate, which tells landlords what their return is likely to be on a property, may have dropped during COVID-19.

For example, a pharmacy paying $100,000 rent a year at a capitalisation rate of 7%  will have a lease value of $1.42 million; if that capitalisation rate dropped to 6% at the same rent, the least value would increase to $1.67 million as the landlord’s equity rose by $250,000: or more than two times the annual rent.

“Because of your resilience… how [pharmacy] set itself up as one of the most resilient sectors and risk-free sectors… you are worth more to the landlord,” Mr Chapman said.

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The value of leases for shops which did not perform well during the pandemic – for example, hairdressers – has “plummeted,” so landlords will lean on the resilient sectors. This means they will want to get more value out of pharmacy.

“This is going to go on for a while,” Mr Chapman warned. “There’ll be a long tail on this perception.”

Pharmacies needed to start considering the terms of their leases now, even if the lease is not coming up for renegotiation for a couple of years, he said.

He also implored pharmacy owners not to include their dispensary sales when reporting their sales to landlords, as this skews the figures – meaning landlords see even more value, on the small scale and the large.

Thirty to 40% of pharmacy owners are reporting their full sales, he said, telling owners to report only their retail and front of shop figures.

“Anything to do with behind the counter… is none of their business.

“This is driving occupancy costs, rents, through the roof.”

He also encouraged owners to get involved with the Guild Digest and become a contributor.

“The next rental report that comes out, we’re going to need huge datasets,” Mr Chapman said.

 

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