Landlords hit by poor retail sales

Retail landlords are facing bleak prospects ahead as weak retail sales bite into demand for space and put pressure on rents, lease conditions and vacancy rates.

Tenants appear to have gained the upper hand in a negotiating environment that has been classified as "challenging" for landlords and investors, according to the latest national survey from Colliers International.

But many retailers aren't able to capitalise on falling rents and higher incentives as the industry struggles with lacklustre consumer spending, rising occupancy costs and the falling Australian dollar.

"The performance of retail sector indicators continues to be mixed," said research director Nora Farren, author of the Balancing the Tenancy Mix report. "Post-federal election we are yet to see the lift in consumer sentiment translate to a sustained boost in retail sales."

Retail turnover has fallen to 2 per cent to 3 per cent, well below the average of 5 per cent to 6 per cent seen in the last decade. Performance over 2013 has been particularly soft, with growth almost halving over the course of the year.

"This reset in growth has put pressure on retailers, who have experienced rents continuing to grow faster than their sales turnover," Ms Farren said.

The flow-on effect for landlords has been to increase vacancy, depress rents and boost incentives to retain tenants.

The vacancy rate for CBD prime retail spaces has risen to 3.3 per cent in the second half of 2013.

Melbourne's CBD mall sector has posted the steepest rise, with the vacancy rate soaring from 1.6 per cent to 5.2 per cent in six months.

But these figures have been labelled inaccurate by Zelman Ainsworth, senior negotiator in CBRE's Melbourne retail division. "The Melbourne CBD malls are going through a major rejuvenation and growth period, with a lot of centres being refurbished and relet or built from scratch. You can't consider them vacant when they really haven't been put on the market yet," he said.

Sydney's CBD malls, which have the lowest vacancy rate of any capital city, witnessed an increase from 1.2 per cent to 1.7 per cent.

For the retail sector overall, the tough trading conditions and growing vacancy rate has caused rents to drop and underpinned a trend towards landlords offering incentives that regularly reach 10 per cent - the equivalent of a six-month rent-free period on a five-year lease.

"Incentives are occurring at lease renewal, and not just for new stores," Ms Farren said. "Tenants receiving the largest reduction in rents are typically those who are seeing structural change in their business, such as newsagents, book and CD retailers, and pharmacies."

The report also found that institutional owners and A-REITs were increasingly funding centre upgrades and expansion plans in a bid to hold market share.

cvedelago@fairfaxmedia.com.au