Poor retail sales put landlords under pressure

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

Retail landlords are facing bleak prospects 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, the latest national survey from Colliers International says.

But many retailers are not 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 past decade. Performance over 2013 has been particularly soft, with growth almost halving over 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 rates, depress rents and boost incentives to retain tenants. The vacancy rate for central business district prime retail spaces has risen to 3.3 per cent in the second half of 2013.

Melbourne's CBD mall sector posted the steepest rise, the vacancy rate soaring 1.6 per cent to 5.2 per cent in just six months. However, these figures were labelled "distorted" 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 re-let or built from scratch," he said. "You can't consider them vacant when they really haven't been put on the market yet."

Sydney's CBD malls had 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.

But while lease terms were also growing shorter in a bid to attract tenants, this could be beneficial for landlords as it avoids locking in low rents and incentives for extended periods.