Retailers in for “hard slog”

shopping, retail, emporium, centreConditions are tough in the retail sector and it’s not likely to get better soon, according to economic advisory firm BIS Oxford Economics (BOE), who said a soft economy, weak household income growth and subdued consumer spending will continue for some years.

Added to this conundrum, BOE said Amazon’s expansion in Australia is yet one more challenge to Australian retailers and shopping centres that have already been facing headwinds on several fronts in recent years.

In its latest report, BOE asserted that while the spectre of large scale shop closures, declining retail employment and abandoned shopping centres that seen in the US is unlikely to be repeated to the same extent in Australia, the risks associated with retail property investment are arguably higher than at any time in the past, and while returns are expected to vary significantly from centre to centre, some will fail.

Report author, senior project manager Maria Lee, observed that the retail environment remains challenging against the backdrop of a difficult economic transition—away from an economy underpinned by a resources boom and back to more broadly balanced growth. “This is proving to be a long, hard slog,” she said. “We expect retail expenditure to remain muted for the next three years.”

Lee said shopping centres will struggle to match the pace of aggregate turnover growth due to heightened competition from additional retail floorspace and the continued growth of online sales—now given fresh impetus by the expansion of Amazon.

“Moreover, there are other challenges in converting turnover growth to additional centre income—such as over-rented shops, high leasing incentives, poorly performing anchor tenants and pressure on retailer profit margins. In addition, changing consumer spending patterns mean there’s a requirement to constantly reinvigorate centres—and this involves spending money.”

BOE forecasts shopping centre net income growth will “barely keep pace with inflation over the next five years,” with probably more downside than upside risks to those forecasts.

Despite the challenges facing the retail sector, BOE noted that retail property remains in high demand among investors, with the dollar value of transactions ‘seemingly held back only by a lack of stock for sale,’ while existing owners are ‘pumping large sums of money into refurbishment/expansion projects,’ seen as a defensive move by BOE.

Competition for assets is driving yield compression, thereby boosting centre values and total returns. Average yields for regional, sub-regional and neighbourhood centres are all below pre-GFC levels. “We can’t see much further yield firming from here. If anything, the main risk is in the opposite direction” suggested Lee.

Putting income and yield forecasts together, BOE forecasts modest IRRs of below 7 per cent over a five-year investment horizon, with considerable variation from centre to centre, with some centres at risk of losing anchor tenants and/or specialty retailers. Even for stronger centres, Lee noted that “even experienced shopping centre managers may have trouble in dealing with what are arguably the toughest conditions yet in retail property investment.”

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Comments

2 comments

  1. Pete from 3Wood Consultancy posted on August 9, 2017

    Always nice to hear commentary from someone who as actually has recently walked through a shopping centre in Australia and spoken to actually retailers for the real story. Increased over-heads, shrinking margins and income gains less than CPI are the norm. So many retailers, including food operators are struggle to remain solvent from month to month while landlords continue to expect their 4-5% annual increases in rent. There are so many cases where the business has a good product, the staff are great and the customer feedback is awesome but the rent is sending them broke. The time is fast approaching for landlords to actually appreciate a viable occupancy cost for each business and stop chasing that allusive square metre rate. The square metre rate won't matter when the tenancy is empty. reply

    • Justin posted on August 9, 2017

      Pete you are spot on but Landlords are willing for a tenant to go broke or leave a tenancy empty rather than negotiate a rent which will make the retailer viable and shops filled in a shopping centre. reply

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