09 Aug Before you sign that lease . . .
The allure of a new property development presents several risks for the uninitiated, particularly unsuspecting hospitality operators with stars in their eyes, keen to turn their business dreams into reality. Think carefully about the deals being offered by commercial leasing agents who are motivated to fill vacant retail spaces in the service of “improving the amenity” and selling apartments quickly. It is crucial to be aware of the risks involved before committing to a lease, and tread with caution where there are lofty promises of free rent periods, or free restaurant fit-outs as part of the deal. Here the key risks to be considered before taking a lease in a new property development:
Uncertain Market Demand: One of the most significant risks is the uncertainty surrounding market demand. A new property development may attract initial interest due to its novelty, but it’s essential to consider whether the demand is sustainable in the long run. Conduct thorough market research to gauge the potential footfall and customer interest in the area. Leasing a property in a development that fails to attract sustained interest could result in low occupancy rates and financial losses.
Construction Delays: New property developments often face construction delays due to various factors such as weather conditions, regulatory issues, or unexpected challenges during the construction process. These delays can lead to postponement of the grand opening or commencement of business operations, resulting in revenue losses and increased expenses.
Lease Terms and Rent Escalation: When entering a lease agreement, it’s crucial to review the lease terms carefully. Developers might propose aggressive rent escalation clauses, where the rent increases significantly over time. This can place a strain on your business if the projected revenue growth doesn’t match the rising costs. It’s common for landlords to impose hefty rent-increases later in the lease term to offset earlier rent-free periods and subsidised restaurant fit-outs.
Limited Surrounding Amenities: In some cases, new property developments might be in areas that lack essential infrastructure or amenities. This can negatively impact the attractiveness of the location for potential customers and employees. Assess the availability of nearby public transport, parking facilities, and other necessary conveniences that can affect foot traffic to your establishment.
Branding and Visibility: New developments might lack the brand visibility that established locations offer. While being the first to establish a presence in a new area can have advantages, it can also mean a more extended period for your business to become known and trusted. Consider investing in marketing and branding initiatives to establish your presence early on.
Potential Changes in the Development: Developers might modify or add elements to the property over time, affecting the overall ambiance and accessibility of your leased space. These changes could either enhance or detract from the appeal of the location, so it’s essential to stay informed about any planned developments that might impact your business.
Legal and Regulatory Challenges: New property developments often come with a host of legal and regulatory challenges that may not be apparent at first. Zoning issues, licensing delays, and compliance with building codes are some of the hurdles that businesses might face when operating in a new development. Ensure that you get good legal advice to navigate these complexities.
Limited Financial History: A new property development may lack a well-established financial history, making it challenging to assess its long-term viability. Research the developer’s reputation, financial stability, and track record to gain insights into their ability to maintain and manage the development successfully.
Competition from Other Businesses: As new developments attract more businesses, competition in the area may intensify rapidly. Consider the potential impact of nearby competitors on your market share and ensure that your business stands out through unique offerings and exceptional service.
Exit Strategy: Before entering any lease agreement, it’s essential to have a clear exit strategy in case the venture doesn’t meet your expectations. Long-term lease commitments without an exit plan can lead to financial and legal complications if the business needs to relocate or shut down.
The takeaway
While new property developments offer exciting opportunities for hospitality businesses, they also come with inherent risks that need careful consideration. Conducting thorough due diligence, understanding the market dynamics, and being prepared for various contingencies are essential steps to mitigate these risks and make informed decisions about taking a lease.
