CMWP Uzbekistan Expert Liliya Yeremenko Tells Spot What Actually Determines Rent Rates and How Retail Property Owners Can Directly Influence Tenant Revenue

Spot, in collaboration with the consulting company Commonwealth Partnership, continues its series of publications on the development of retail real estate in Uzbekistan. In the first article, we examined the main formats of retail real estate, their specifics, and prospects in the local market.

In the new issue, CMWP expert Liliya Yeremenko explains why retail rent rates cannot be arbitrary, what they actually depend on, and how retail property owners can directly influence tenant revenue.

Liliya Yeremenko, expert at CMWP Uzbekistan.

"We often receive the same question from property owners and tenants: how to correctly determine the rent rate so that it is fair for both parties?
Retailers say they cannot operate at the price offered by the landlord. Meanwhile, landlords base their rates on neighboring properties. To reach an agreement, one needs to understand how rent rates are formed in retail real estate.
In reality, there is no universal figure – the rate always depends on the specific location, business profile, and its actual economic indicators. In retail, the rent rate is not just a number in a contract, but a balance of interests that determines the success of both the landlord and the tenant."

In practice, the rent rate is directly linked to a store's turnover. In global and regional practice, it ranges from 2% to 20% of revenue, depending on the category. If the rent burden exceeds this range, the business risks operating at a loss.

Understanding this logic is important not only for the tenant but also for the owner. As soon as a property owner starts considering the rate not from the perspective of "I must pay as much as they ask in the neighboring building," but through the lens of the tenant's profitability, a constructive dialogue and real deals begin.

How to Calculate Rent Rates

It seems simple: to increase revenue, one must choose a "good" location. We've all heard this phrase as a magic spell: "location, location, and location again." But in practice, it's not so straightforward.

Indeed, location determines a lot in retail, but not everything. A location suitable for one business can be a failure for another. Moreover, even in the same area, one shopping center can be successful, while another remains empty.

The fact is that the tenant is not solely responsible for the results. It's a mistake to assume that the retailer must "pull" their sales themselves: set up displays, run ads, determine prices. Of course, they do all this by default. But the property owner also influences success: through the right tenant mix, infrastructure development, landscaping, event marketing, and creating an atmosphere.

Without these actions from the owner, a shopping center space would be just walls, a floor, and a ceiling, not a place for enjoyment and meeting customer needs.

The rent rate is determined by two key indicators: the number of transactions and the average transaction value. The number of transactions is essentially traffic: how many people came and made a purchase. The average transaction value is how much one customer spends on average. It is obvious that both influence revenue, and therefore, the limit within which the retailer can afford to pay rent.

Shopping Malls vs. Street Retail

A shopping mall owner is not just a proprietor of square meters. They are the architect of their tenants' success. Retail real estate is an ecosystem where everything is interconnected, and success is only possible when all parties win.

In practice, an owner can significantly influence key retail metrics – traffic and average transaction value. A shopping mall owner can greatly impact tenant sales by creating the mall as a product and subsequently managing it professionally.

The key success metric that a shopping mall management company (MC) should focus on is tenant sales. Not the rate in a vacuum, but the revenue of those operating within the space. However, before the MC can operate, the right and in-demand product must be created. This is already the developer's responsibility: to create the concept, handle landscaping, organize rest areas, cafes, food courts, entertainment, comfortable navigation, cleanliness, and security. All of this directly impacts foot traffic.

It is important to understand that there is no universal rate for everyone in a shopping mall. The management company places tenants in such a way that they can operate most effectively and, moreover, create a synergistic effect for each other, considering their proximity.

Therefore, in some cases, it is more beneficial for the landlord to slightly reduce the rent for a specific tenant and place them in a particular location. This placement will increase their own sales, the sales of neighboring tenants, and generally positively impact the perception of the place for visitors, ensuring their repeated return to the shopping complex.

It is these small but important "tricks" that distinguish a professional landlord, developer, or management company from a novice and directly contribute to increasing tenant sales and the success of the mall itself.

In street retail, the developer has fewer opportunities to influence tenant sales, but this does not mean they have none. Unlike shopping malls, where tenant sales management is partly the responsibility of the management company, in street retail, the owner acts more as an ecosystem curator.

The main thing is to form a strong retail corridor. Here, everything depends on the developer: the premises, the tenant profiles, how they complement each other. Not all formats work in street retail, and proper geometry, visibility, signage, and technical conditions play a significant role. The more intelligently all this is thought out, the higher the demand and rent rate.

The better prepared the premises are from this perspective, the higher the demand for them, and consequently, the higher the rent rate, as the tenant will be able to conduct their business more effectively, thus maximizing revenue.

Rent Rates and Their Types

Although the interests of the tenant and landlord may seem different, in reality, both want to develop their business and make a profit. In practice, there are several schemes that help parties agree on rent rates and achieve a win-win outcome.

1. Combined Rate: typically, this is X% of revenue, but not less than a fixed amount. This approach gives the tenant confidence that their rent burden will remain within the business model, and the owner a chance to earn more if the tenant shows high results. This is a classic win-win.

This approach gives the tenant confidence that the rent burden will remain within their business model, and the owner a chance to earn more with high sales.

2. Percentage of Revenue Only, Transitioning to a Combined Rate: this option is suitable when a retailer is just entering a project and their risks are high. For example, in the first year, rent is calculated only as a percentage of revenue. Subsequently, a minimum level is set (e.g., 80-90% of the first year's payment), and the combined scheme is activated. This method is often used to attract major brands or strategically important tenants.

There are cases where a retailer sees risks in their placement in a shopping center/premises, but the developer is interested in the tenant. In such situations, the following option can be a mutually beneficial solution. In the first year, rent is calculated solely as a percentage of revenue. From the second year, a minimum fixed rate is introduced, which is approximately 80-90% of the first year's amount. This allows for a transition to a combined model and accommodates the interests of both parties.

3. Step Rent: the rate increases in stages: first, a minimum level, then a gradual increase to an optimal value. This allows the tenant to reduce the initial burden and the landlord to secure a stable partner. It is particularly relevant in street retail, where "promoting" a location may take longer than in a shopping mall.

4. CAP (Cap): a maximum rent level is fixed – whether it's an absolute rate or a percentage of revenue. This is used rarely but is effective for strong seasonality. It creates a rent "corridor": there is a minimum and a maximum, which reduces risks for the tenant during peak and off-peak periods.

For example, for a flower shop in March – a month of peak sales due to widespread International Women's Day celebrations – the maximum rent did not exceed a pre-set limit. In other months, the usual scheme applied.

5. Rent Holidays: exemption from rent during renovation or launch periods. The duration ranges from 1 to 9 months. This gives the tenant time for preparation, especially for new projects.

6. Rent Increase Based on Turnover: the minimum rent increases as the tenant reaches a certain turnover. This is a reasonable compromise when a retailer is willing to start with a low initial payment, but the developer wants to secure growth.

We discussed even more practical examples, schemes, and nuances in detail in our video podcast with Alisher Akramov, CEO of the restaurant holding AB GROUP. These schemes help make rental conditions flexible and understandable for both parties. This win-win approach is based on the owner considering the tenant's business profitability limits, and the tenant understanding the owner's costs and the value of the premises.

Essentially, forming a rent rate is not just about numbers and formulas, but also about the willingness to listen to each other.

The win-win approach maintains a balance of interests, strengthens the market, and creates a foundation for the long-term successful development of both tenants and owners of retail properties.

Source: Spot.uz

Photo: Evgeny Sorochin / Spot