Are anchor tenancy leases anti competition?

The Competition Authority’s Department of Competition and Research Analysis is about to embark on a national market inquiry into long term anchor tenancy lease agreements in shopping complexes. The inquiry aims to assess whether anchor tenancy agreements are in contravention of the country’s anti competition laws.

The South African Competition Commission did a similar inquiry in  concerning long term leases agreements for anchor tenants in South Africa but announced recently  that long term exclusive leases could “give rise to considerable competition concerns and could amount to a vertical restrictive practice or an abuse of dominance involving exclusionary conduct by supermarket chains” but expressed doubt on the  anti-competitive effects of the conduct.

The question that arises though is why are there anchor tenants lease agreements?
Outule Bale, Khumo Property Asset Management Chief Executive Officer outlined three main reasons for the practice,
“Firstly, they have a bigger role to play in pulling buying feet into a mall as a whole, something which line tenants  cannot do on their own. The presence of anchor ensures to a greater measure the sustainability of a mall,” he said. Bale said the second reason had to do with recovery of investment made on the property as “anchor tenants occupy huge spaces which cost a lot in terms of monthly rentals and initial capital required for fixturing/fitting.  Recovery of the initial outlay normally takes place over the first three to five years, depending on the type of anchor and size occupied.  A shorter lease would therefore not offer an anchor tenant sufficient time to recover the capital outlay and begin to make good business in a given mall.”

The final reason according to Bale concerns risk because an investor, who has spent capital developing the big space that an anchor tenant occupies, is better off (risk-wise) with a lease that offers cash flow certainty over a longer period.

“It can therefore be concluded that an idea of developing a shopping mall without the strength of an anchor tenant is likely to fail from conception as investors strive to achieve sensible balance between financial/return expectations and risk,” he said.

Bale further added that a restrictive regulatory framework has the potential to stifle development of malls if careful consideration is not taken.
Bale however admitted that the practice was open to abuse and needed close monitoring,   “I would agree to the removal of clauses that specify tenants by name and that certain citizen empowerment levels must be achieved and proved with retail/mall developments,”  he said.

Apex Properties Chief Executive Officer, Umesh Loona welcomed the inquiry saying it could eliminate monopoly,They want exclusive terms which eliminates competition The inquiry is a good initiative for the market as it will open up the market. This will also help private sector develop and grow the market. More players can come into the market and developers will have more choices. When there is more demand, developers will also make more money.”
Loona said the practice was entrenched by financial institutions. “Banks cannot give you loans unless have long leases especially with anchor tenants. When we talk anchor tenants we want to have long term leases possibly 10-15 years. It makes your development bankable.  When signing a lease with tenants, you need the right tenant; that is those who are successful, have a track record. After all you do not want your partners to be sinking, you want them to be successful,” Loona explained.

Other industry players who did not want to be mentioned emphasised the need for property developers to recover investments made in developing shopping centres by securing long term anchor tenants. They were also in agreement that retailers should not demand exclusive rights in shopping centres for excessive time periods, beyond what is fair and reasonable in relation to how long it takes a landlord or financier to recover their investment.

Meanwhile, Nkala said the Competition Authority is obviously concerned about long term exclusive leases which have restrictive clauses as they could lead to contravention of the Competition Act.

Nkala stressed that exclusive contracts were not illegal under the Competition Act but may be authorised on a case by case basis citing a case where the Authority intervened at one shopping mall in Gaborone where restrictive clauses that prevented entry of a small grocer at the shopping mall were eventually removed after the intervention of the Competition Authority.