d his career with Lend Lease in 1985 in a marketing capacity and quickly rose through the rank and was appointed marketing and leasing director in 1992. COMPANY PROFILE: Stockland was founded in 1952 and is now Australia’s largest diversified property group – owning, developing and managing a large portfolio of shopping centres, residential communities, retirement living villages, office and industrial assets. Stockland owns and operates 40 shopping centres across Australia. It recently announced a $23.5 million solar project across 10 centres in New South Wales, Queensland and Victoria. IRW: How has the past year been tracking at Stockland? JS: The last year has been mixed, it’s been choppy. In terms of our growth in the last year, the retail property asset class within the diversified model that we operate is about 54 per cent of the asset base. It produced funds from operations, or FFO growth, at that total level of 4.1 per cent, which is a pretty solid outcome, and on a comparable basis, where you allow for developments that disrupt the numbers, it grew on a like-for-like basis by 3.5 per cent. So we were pretty comfortable with that, in light of the choppiness of the market in the last year. It’s fair to say we’ve been in a very low inflation environment. We’ve had retail price deflation in many of the commodities. It’s fair to say that Australia has been rotating its emphasis out of probably 15 years of the mining and natural resources boom, back into a more diversified economy. That has had some bearing on our headline results, given that about half a dozen of our critical shopping centres are in areas that have a significant mining and natural resource exposure. While they’re in good shape, they’ve come off an all-time high. There’s nothing wrong with the real estate, it trades well, but it does have some dampening downward pressure on headline sales. What we’ve been doing in our retail portfolio in the last 10 years is three things: We’ve been creating long-term sustainable communities, where we create from scratch a full suite of product for our customers – residential, medium-density town houses, retirement living and retail core town centres. The second bit is we’ve been taking over trading high-performing shopping centres that have been in markets of relative under supply with above-average population growth and increasing density. We’ve been taking that real estate and making it more significant – Wetherill Park and Western Sydney, Greenhills in the Hunter Valley, Merrylands in Sydney and Baldivis in Perth. The third piece is constantly reformatting or remerchandising existing shopping centres – taking existing floorspace and creating new outcomes. So by that, I mean existing floorspace that may have not that long ago been a supermarket, which today is now a Harris Scarfe homewares store or taking a large Dick Smith tenancy that went bankrupt and turning it into a new, on-trend retailer like H&M. A lot of that reformulation has been significant, probably more so in the last three to four years as online changes the nature of retail. IRW: Food and beverage are very much on-trend right now and a lot of shopping centres are remixing their tenancies to focus on that sector. JS: There is a balance to everything you do and in shopping centres and retail, it’s all about that geographic area you’re operating in. How much competition is there? How much supply? There’s no point building new supply if it’s already there, because no-one wins. You just oversaturate the market with too much floorspace. Essentially, there are six areas that have growing in the last seven years – not apparel/jewellery, no surprises there. Mini-majors, like a large retail format store like H&M and JB Hi-Fi – that category has grown materially. The discount department store category in our portfolio has not grown. Smartphones and comms technology has grown. Food retail and the large format lifestyle fresh food retail categories have grown. Clearly there has been growth in supermarket pursuant to Aldi growing faster and the response from Coles and Woolies has been phenomenal – they have upped the ante in terms of their investment focus, store network, customer service and assortments. I don’t remember the supermarkets in Australia being as good as they are today, if I think back historically. Fast casual dining, entertaining and theatres have been growing. The other area that has been growing that doesn’t get talked about much is retail services. Increasingly, shopping centres are getting more diverse in their range of offer for customers. I don’t think you can say anything is internet-resilient, but some of these product lines are less susceptible to internet leakage. If you go back 35-40 years ago, all these services – the doctor, dentist, physio, obstetrician and gym – they were all on the streets, but now they’ve all come into the mall. If you look at the total proportion of gross rent paid in our portfolio today at 30 June 17, 18 per cent is in apparel, kids, men’s ladies, unisex, surfwear, plus jewellery. Eighteen per cent is services. So you’ve got services producing the same level of gross rent today as apparel and jewellery – that speaks to all of the change that’s going on in the underlying retail assets. Increasingly, it’s becoming a big piece of our business and the rent out of that type of product is fairly sticky. It’s not as volatile as apparel. When you consider what we’re talking about, extending the use of bricks-and-mortar and effectively when you think about it logically, you’re optimising the fact that the real estate is already there. IRW: Where do you see bricks-and-mortar going in the future? JS: We shouldn’t be scared of the internet. Bricks-and-mortar retailing has been around for a long time. Direct catalogue selling has been around for decades and decades, so it is not correct to say that at any point in time, that 100 per cent of our retail transactions always has transacted in bricks-and-mortar. There’s been decades of retailing that’s happened through TV direct, through interactive TV, through catalogue selling. It is obviously a lot more transparent and a lot faster now, courtesy of the internet, our iPhones and the extent to which our customers can get price transparency instantaneously. What technology has done is it’s made retail global. Anybody who says it’s not global today is a dinosaur. It’s a global platform. We should embrace online and part of that means understanding what retailers need in the future in order for them to maximise their omnichannel presence. So by that, I mean digitised hubs, parcel pick-up, making it simple for customers to order online and pick things up, drive through parcel pick-up and having a high quality and fast wi-fi system in shopping centres that can respond quickly and giving our customers every chance to transact. Ultimately at the end of the day, it’s our job to make sure we’re creating the best environment for a retailer to transact and if it means the retailer needs to change the format, rotate their stock, rethink how they’re operating, have a strong digital connected piece of their real estate to maximise their chance of transacting, then it’s our job as landlords to ensure that we deliver that. IRW: In your experience, how open have retailers been to embrace digital? JS: Some have been very good and fast. Some have not. And if the truth be known, I think for many decades, Australia was to some extent immune to what had been going on globally. What the internet price transparency did was they started to open options for customers. Then, all you’ve got to do is look at the census and the level of immigration into Australia and how it’s reshaped the country. Aussies are well-travelled, we’re probably the most well-travelled in the world, so we see things elsewhere in the world, then we come back here and go, ‘Why don’t we have it?’ Global retailers that have been coming to Australia are succeeding. There are some examples where success hasn’t been met but by and large, in the last decade, there’s been success – Aldi, Costco, H&M, Zara, Apple, Pepkor. You go back 25-30 years ago, internationals came to Australia and they all left, but now, they’re coming here and succeeding. I think they’re succeeding because Australian consumerism has shifted. I think it’s fair to say that as a nation, we probably didn’t appreciate the level of contestability for disposable income. I actually think we got a little bit too set in our ways. We were possibly complacent historically, but I think all of that’s shifting and shifting quick. I say that as an industry, not as Stockland. I think all of us collectively, the whole industry, is seriously up to the challenge now. IRW: How do you walk the fine line between supporting your retailers and maintaining profitable centres? JS: It’s not necessarily the case with the big operators, but certainly for the smaller independents and the mid-small size retailers, it’s in our interests to help them and we help them in many ways. We provide them with a lot of detailed research about their customer, give them the feedback. Generally speaking, there’s not a material amount we can add to the big, multi-dimensional chains that do well, save for research material we can provide them on the area they trade in. There are times where we may form the view that working with the retailer and getting a shared outcome is more important than necessarily the year one rent. But there are other occasions where you form the view that the retailer, doesn’t matter what you do, it won’t get there, so you have to have that conversation with them and it may be painful to come to the conclusion that you have to replace them when it comes to remerchandising. Ultimately, sometimes you have to look at it and go, ‘It’s yesterday’s brand. Customers are not gravitating to that brand anymore.’ IRW: For most of the retailers we’ve spoken to, rent is one of the biggest challenges for them. JS: I look at our data and is the level of rent sustainable? It’ll vary. I went through our tenancies, you’ll see variability from four per cent to 40. It depends on the retailer. For example, someone asked me a few weeks ago, how could a retail service sit at 25 per cent of the reported sales if they’re paying 25 per cent in rent? And I said to the person, ‘How much inventory are they carrying?’ The answer is none. In that particular instance, it was a drycleaner, which has upfront capital to build out the business and equipment. After that, there’s virtually no inventory. Unlike a jeweller or a discount department store, which is carrying significant amounts of inventory. The variability in the rental equation is very significant and I do get concerned when there is dialogue that is very homogenous in its thoughtfulness, but not reflective of reality. To me, it comes down to one simple thing – for the use and the location that it’s in, is [the rent] sustainable? And that’s where we try to apply our own thoughtfulness. I’ll be the first to say we don’t always get it right. I’d say more often than not, we strive to make sure we have good relationships with retailers and work with them to get a shared common goal. IRW: During your career in retail, how do you think shopping centres have changed over that time? JS: How many department store labels existed in Australia in 1985? I’d guess 30-40 – John Martin’s, Aherns, McDonnell and East, Grace Bros, Mark Foys, Norman Ross, Waltons…retailing has been evolving since it started and it will continue to evolve. What I’d say is the evolution is a lot more visible today. When I started in the industry in 1985, at any given shopping centre, alongside a supermarket, we would have had at least four butchers. We would have had two fruit and veg stores. One or maybe two fish shops. Two bakeries. That’s all shifted, because supermarkets are doing a sensational job today in fresh, which they weren’t doing in 1985. In 1985, we had all those department stores and on top of that, we would have had very few of the services we talk about today. I don’t remember in 1985 more than maybe one barber in a centre…I don’t remember any nail bars, maybe one. But look at the plethora of services today. I was walking through a centre in Sydney metro and I looked in every single nail shop on a Thursday between 1 and 2.30pm and I’m not exaggerating, every single one was full. But in 1985, I don’t remember having any. There would have been a hairdresser and maybe a barber. Back then, they were all on the street. And childcare in 1985? In a mall? I don’t think so. But look what’s happened. The evolution is simply faster, quicker and more visible, that’s how I think about it and our team in Stockland must be up to that challenge. We have to respond, be more pro-active and be ahead of the curve. You have to be, because our customers know more about what’s going on in pricing than we do. The shopping centre in the future will be increasingly diverse, digitally-connected, more multi-dimensional and mixed use in nature. Who’s to say that in 20 years’ time, at one of the significant greenfield projects we’ll do at Stockland that there won’t be an Amazon fulfilment centre? It’s about adjusting the business model and constantly looking at it, and asking, ‘Is that the right business model for that market?’ Bear in mind, not one market in Australia is homogenous to another anymore. In the mid-80s when I started, there was a high degree of sameness. Now there’s diversity in our population, not only in terms of global diversity, but the age and evolution of it – so the days of saying it’s all the same… forget it, it’s very heterogeneous.