High retail growth era over | IR News

High retail growth era over

Posted Date: 10/07/2012

By Inside Retail

Retail turnover growth this decade won’t return to the golden age that ran from the mid-1990s to the GFC, according to industry analyst and economic forecaster, BIS Shrapnel.

That halcyon era was the result of a debt-fuelled spending surge by consumers, but today’s market faces significantly lower rates of turnover growth, the company has concluded.

According to the company’s latest report on the retail property sector, Retail Property Market Forecasts and Strategies 2012 to 2022, BIS Shrapnel forecasts that growth over the next five years will average just 2.9 per cent per annum, compared to the golden age of retailing from the mid-1990s to the GFC which saw turnover growth of almost five per cent per annum on average in real terms.

“There should be some improvement following very subdued rates of turnover growth in the last few years,” says report author Maria Lee, senior project manager at BIS Shrapnel. “However, while we expect turnover growth to strengthen through 2012/13 and 2013/14 in line with a strengthening Australian economy, growth will remain fairly subdued in the medium to long term.”

A key focus of the BIS Shrapnel study is to understand how aggregate turnover growth will flow through to shopping centre incomes and, in turn, investment returns.

“Shopping centres will see markedly lower rates of turnover growth thanks largely to the growth of online shopping and the dilutionary effect of additional retail floorspace,” says Lee.

The rise of online retailing

The report shows that online retailing is now a force to be reckoned with.

“Our online retailing survey showed a dramatic rise this year in the online offerings of the top 20 domestic retailers,” says Lee. “Over 50 per cent of the top 20 now have a comprehensive online offer. Although that’s a great improvement, it’s still not impressive by international standards. The department and discount department stores are still trailing — although they are working on major improvements.”

Online retailing has a two-pronged impact. There’s the obvious effect of taking market share from ‘traditional’ retailing. But Lee explains that there’s another effect that could be equally important.

“Consumers are using price comparison websites or apps on their mobile phones when in-store, and then demanding a price-match in order for them to buy there and then,” says Lee. “This can have an impact on retailer profit margins.”

Another aspect of online retailing to consider is purchases by Australians from overseas websites. This expenditure isn’t counted within ‘retail turnover’. Indeed, the growth of online spending overseas helps to explain why consumer spending in total (including overseas online spending) is growing at a solid pace but retail turnover growth is subdued (Chart I).

A further explanation of this gap is the retail spending that takes place in-store by Australians when they are overseas on holiday — which is happening more and more. Both of these factors are likely to continue to be a drain on retail turnover growth as long as the Australian dollar stays high.

Chart I: Household spending and retail turnover, Australia

Retailers and shopping centre owners need to "work harder"

Meanwhile, construction of new retail floorspace continues to outpace both population growth and real retail turnover growth. This has been a long term trend in Australia, broken only during the late 1990s/early 2000s period of unusually strong turnover growth.

“It’s surprising that this is happening now, when floorspace growth is relatively muted due to the challenges facing development in the post-GFC environment,” says Lee. “It means that, in real terms, turnover per square metre is falling.”

Even though turnover growth is weak, shopping centre incomes are supported by the fact that the majority of tenants pay fixed annual rental escalations of around four per cent.

“The problem is that if rent is going up by four per cent a year but turnover is growing by less than that, occupancy costs rise,” says Lee. “Specialty shop occupancy costs are at an all-time high. They are unsustainably high for some tenants.”

Those costs are leading occupants to either not renew at the end of the lease or demand a cut in rent to stay. If they leave, the incoming tenant is achieving a more attractive offer, in a combination of lower rent and/or leasing incentives. “There’s widespread evidence of slowing centre income growth as a result,” says Lee.

BIS Shrapnel forecasts little chance of improvement in the near term, but expects centre income growth to pick up from 2013/14. Nonetheless, the dominance of fixed annual escalations means that centre income growth will fluctuate within a fairly narrow band of around two to five per cent per annum. But Lee warns that shopping centre income growth could be weaker if the Australian dollar falls.

“The strength of the dollar has been instrumental in supporting retail profit margins at close to historic highs,” says Lee. “Any substantial fall in the dollar puts profit margins, and retailer ability to pay rental increases, at risk.

“Retailers and shopping centre owners are going to have to work harder than ever to sustain growth. It’s critical that they use the internet diligently and creatively to service their customers and enhance the in-centre shopping experience.”

The weak prospects for income growth have clear implications for total returns to retail property. Prior to the GFC, total returns were solid thanks to the long term firming of yields — even if income growth was weak.

“But that process has run its course and we don’t expect to get back to 2007 yields before the next boom — which is unlikely to be in this decade,” says Lee.

Without firming yields to save the day, modest income growth won’t be enough to generate the strong investment returns that investors have become used to. Prospective returns for regional shopping centres are between nine and 10 per cent over a five-year and 10-year investment horizon.

“This is okay, but not impressive,” says Lee. “Some investors are likely to turn their attention to stronger-performing office and industrial property instead.”

Keywords: Retail sales, BIS Shrapnel

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