Retail property futures

shoppers, shopping, centre, mallRetail property is overstuffed with news at the moment so instead of dealing with just one issue in my column this month, I’m going to try to squeeze in two.

The first issue is the boring, but all important bread and butter question of what is happening in the rental market.

A few days ago in the Sydney Morning Herald, Michael Pascoe wrote an article in which he said that “some local retailers aren’t up to it, lagging international best practice,” and so on dum-di-dum-di-dah, meaning they couldn’t pay more rent because, well, they stink.

Then, speaking about the deluge of international fashion retailers fanning out across the nation, he added, somewhat presciently, that “some of those foreigners with Australian ambitions are riding for a fall”.

There is no question that some new international arrivals in the Australian market will not succeed down under, and some are circling the drain even as we speak, however, they have set in motion an irreversible process by which A shopping centres are diverging radically in both quality and character from B centres. This process is being accelerated by the falling Australian dollar.

Evidence of the metamorphosis underway is apparent in the latest “Sitting Tenant Renewal Report Update”, produced by Sydney-based Leasing Information Services (LIS) for its clients.

The LIS report analyses 257 renewals in NSW, Queensland, ACT, and NT between July 1, 2013 and December 10, 2014.

The headline weighted average is a razor thin 0.6 per cent increase across the four jurisdictions, with a 3.5 per cent increase in Queensland, more than offsetting a 2.2 per cent decline in NSW.

What is striking though, is the depth of the malaise in particular tenant segments, especially apparel.

Renewals on apparel and accessories space are down 2.2 per cent, but in NSW the number is a lot worse. Meanwhile, food catering and services seem to be doing a whole lot better.

LIS MD, Simon Fonteyn, sums up as follows: “Rollover rates were mixed. Fashion, footwear, and jewellery tenants negotiated significant rent decreases. On the other hand, renewal rates for food, services, and banks increased.”

Recent bankruptcies among second strong fashion chains are probably only the tip of the iceberg, and if it wasn’t obvious before, even the most hide-bound operator of B malls will now realise that sustained rental recovery is only possible by remixing away from fashion.

Thus, we will come to see a situation where the Australian mall universe is divided between the top international fashion oriented properties, the trophy malls, and a large number of properties that turn their back on the traditional merchandise mix and play to local strengths.

Far from the vision of hell feared by many, myself included, a couple of years ago, this new order of things is potentially good news if the transition is managed skillfully.

Shopping centre productivities can continue to be stratospheric by global standards in centres that position themselves as nothing more than everyday social shopping nodes.

Shopping centres need to be strategically leased, beginning right now, and that’s not something Australian shopping centre operators are known for. It will take a change of culture that isn’t easy.

Some challenges that faced the shopping centre industry have faded into the background for now.

E-commerce is not growing anywhere near as fast because the parcel distribution system in Australia is a sclerotic and error prone mess, set up for the benefit of carriers instead of consumers. Add to that the swan diving Aussie dollar, which is putting a big damper on offshore e-commerce sales.

Speaking of the Aussie dollar, all local retailers, beginning with those that are unhedged, are going to have a terrible time managing gross margins as they find themselves unable to pass on higher wholesale prices to consumers.

For retailers that are already on the brink and need just a little breath of wind to blow them off their perches, the margin compression exerted by the currency depreciation might just provide it.

Target undone by property

Now to my second topic – the catastrophic failure of US discount department store retailer, Target, in Canada.

This looks at first blush like a pure retailing story, but it’s actually a property story too, with some important lessons for all expanding retailers.

Target lasted less than two years north of the border after it took up the leases of about 130 stores previously occupied by Zeller’s, a moribund Canadian retailer.

Occupying another retailer’s locations and even using the same boxes turned out to be a bad expansion strategy in a foreign country, particularly when they were mostly B and C locations to begin with.

Why, Target, why? The answer is that opportunism trumped common sense. Target is not the first retailer to find that a good operator can’t always make a silk purse out of a sow’s ear when it comes to store locations.

As I mentioned earlier, a number of international retailers are not going to make it in Australia. Like Target in Canada, will some fail because they made awful real estate choices?

In some cases the answer is yes, or at least real estate will be a contributing reason. But far more important factors will be involved. After all, most new arrivals in Australia are occupying purpose built stores (think Costco and fashion retailers at places like Macquarie Centre and Emporium).

For those that fail, reasons other than real estate will be at the fore, including sloppy market positioning, hubris, supply chain challenges, and the fashion brand suicide that frequently results from franchising.

Even so, there is no hope of failure on a scale that will secure the position of Australia’s creakier homegrown fashion chains.

Things that seemed impossible five short years ago are now happening in the Australian market – it’s time shopping centre operators cast aside their fondly held assumptions about what might happen in the next five.


Michael Baker is principal of Baker Consulting and can be reached at and


1 comment

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    Alasdair Morgan posted on March 6, 2015

    An interesting piece on how the retail landscape is about to change. Lots of challenges but lots of opportunity. reply

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