Chasing retail's smart money

James Stewart of Ferrier Hodgson has prepared a graph about the likely growth in internet retailing that will frighten bankers, particularly those who are worried about their jobs. Bankers will look at business lending propositions with a degree of self-interest – they don't want to make a mistake. On the other side, retail tenants will also be frightened because they usually have to put their houses on the line and the changes taking place make them very nervous. And perhaps the greatest fear comes from those shop owners who are highly leveraged.

Over the years, one of the safest investments has been owning a shop in a good shopping centre. Many investors were not afraid to borrow heavily on them. There seemed a never-ending number of tenants prepared to pay exorbitant sums to fit them out and commit to big rents. But that's changing and by the end of the year the landscape will have changed dramatically.




The Ferrier graph above shows one US retailer is selling 18 per cent of their goods online. Almost all US retailers have sales online well above the Australian averages. Partly because of our high retail costs, the difference between buying online (from offshore) and local prices can be staggering. The successful retailers will find a way to lower their costs to be more competitive with overseas retailers. Ferrier say that retailers are going to need to work out how they mix the online and store sales. In some retail areas, the online percentage will rise to 30 per cent in Australia, and this figure is backed by the research of the Quantum Group. Many retailers will adjust, others will not. Rents will depend on the talents of the tenants.

Right now, Sydney and New York fight over who charges the highest retail rents in the world. With the dollar above parity, Sydney has its nose in front but Melbourne is not far away. In the next year or two, rents in many areas are going to fall and in some cases fall sharply.

The big upmarket centres like Westfield's Bondi and Chadstone believe they will be insulated. Indeed, Chadstone is backing that view with a massive expansion. I think these centres may experience a delay in reaction but over the next two years the downward movement in rents in the rest of the country will be too large for them to be insulated.

And with that fall in rents will come a fall in the value of the rental properties, which will lead banks to request that building owners contribute more equity to maintain lending ratios. This will force shops onto the market.

There are three forces pushing down rents. The first is that consumers are very price conscious, which means that margins are tight. Second, the new labour laws mean that for many retailers opening on the best trading days – the weekends – is much more expensive. If retailers can't put up prices they must accept lower returns – and lower returns will need to be transferred into lower rents and capital values. And finally there is the internet.

Retailers have to be much smarter.