A clear warning for retail property

Those exposed to this sector must watch the market trends.

By Robert Gottliebsen · 12 Apr 2018

By Robert Gottliebsen ·
12 Apr 2018

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Summary: A sharp rise in rental vacancies is placing Australia's retail property market under strong pressure, and that's not necessarily being reflected in property values.

Key take-out: For investors exposed to retail property, either directly or through listed companies, there are very clear warning signs for this market sector.

This week I found myself involved in segments of the property industry, which was depressing. But I did find a potential housing boom area in a surprising place.

Around Australia a lot of large and small investors have a hankering to buy retail property. Many of the shopping centres yields are actually falling, because a 5 or 6 per cent return secured by bricks and mortar rentals looks a whole lot better than 2 or 3 per cent on bank deposits.

Indeed, there is a lot of money out there for those assets. But, despite this, the actual market signs are not at all good.

The Macquarie Group has totted up a total of 227,000 square meters of lease space in malls and other centres that is going to come onto the market as a result of some 22 retailers that have slipped into liquidation or announced store closures in recent months. In addition Toys ‘R' Us and Babies ‘R' Us are letting go some 117,000 square metres.

That is a massive 344,000 square metres in vacancies in malls and shopping centres.

If you are managing a centre you simply can't afford space to be vacant for any length of time – it indicates the centre is dying. Sometimes you're lucky and tenants come from places you didn't expect, but mostly there is only way to revive a dying centre, and that is to cut rent and present an incentive for a cheap retail opportunity. Of course, as landlords cut the rental rates those new rates leak out and the retail groups that signed up many years ago at much higher rental rates get very angry.

The most public of those that are angry is Solomon Lew, who is moving his stores out of centres that don't reduce their rent.

And many small strip shopping centres are getting harder and harder to operate using the cash economy, and so stores must pay award wages, including public holiday penalties unless they confine staff to the family. Over Easter restaurant staff bills were horrendous, and those that didn't pick up a lot of traffic lost heavily.

The pressure on rents that we are seeing in malls will spread to many shopping strips. Of course, there are many malls that are insulated from this because they have a long tenant waiting list, and the same applies to strip shopping centres.

But life in the retail world is getting a lot tougher, and that change in the market is not always being reflected in the value of retail shops, malls and shopping centres. It is a clear warning.

Conversations over dinner

This week I was at a dinner and began chatting with the chief of a sizeable home builder, and naturally our conversation switched to house prices. I quoted the AMP, which believes that house prices will fall about 5 per cent this year and there will be further falls next year. The cause of the fall – of course, the credit squeeze which is beginning to be applied by banks (under pressure from APRA), firstly by limiting the amount of money they lend on houses and perhaps more importantly, by tightening their lending criteria.

The builder came back and asked me whether I realised that in the areas where the builder operated most houses are purchased by people who borrow 95 per cent of the equity and they often have other debts they don't tell the bank.

A 5 per cent fall in house prices would wipe out the equity of a lot of people and if the market falls further we will see negative equity. He shook his head – this would mean a much tougher business for him. My only comfort for him was the potential that as house prices fall, the banks will realise that this will threaten their loss ratios and may loosen the purse-strings.

A problem for the south

Looking around Australia, the worst overall situation is not Sydney, Melbourne or Brisbane.Hobart has been doing well and Perth is showing signs of recovery, which leaves us Adelaide.

Poor old Adelaide lost a seat in the recent federal redistribution, reflecting the fact that its population has been rising far slower than Melbourne and Sydney. But Adelaide has a unique asset in Defence Industry Minister, Christopher Pyne.

To bolster the South Australian economy, he has played a leading role in Adelaide gaining part of the patrol boat contract, the frigate contract and the submarine contract. These are very large undertakings. While a lot of the activity will take place overseas, much will take place in Adelaide. Already a huge facility is being constructed. Keeping all activities centralised to a single location is a potentially dangerous strategy, however the CFMEU (the Construction, Forestry, Maritime, Mining and Energy Union) will be rubbing its hands with glee.

A lot of people will go to Adelaide first to be trained and then to work in the shipbuilding industry. It will be a big boost to the city and will surely push house prices higher in areas north of Glenelg. I've always said to buy investment houses in areas you're familiar with or know something about. For those who understand Adelaide it may be an opportunity.

Trading blows

As we have seen week-in, week-out, Wall Street rises and falls in dramatic fashion depending on what President Trump tweets or what's happening in the global trade area. Interestingly the ASX has not shown anywhere near the sensitivity, potentially due to our belief that there's an underlining demand for our minerals and other exports to China including tourism.

We must hold on to hope that the current government is careful in regional and trade gymnastics, so we can still get the best possible access to the Chinese market, while doing so, we're also depending on the Americans for defence.

For the share market traders who are picking the market well this is a wonderful time, but for those not selecting the right trends, it's miserable.

Markets remain highly volatile, so unless you know what you're doing, be very careful in trading. Invest for the longer term.

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A clear warning for retail property

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Conversations over dinner

A problem for the south

Trading blows