Rents floored by the hard reality of retail softness

In an era of weaker retail sales, the days of retail landlords extracting outsized rent increases appear to be over. The tide is turning in favour of specialty retailers.

A mere five years after the onset of the global financial crisis, Australia’s retail landlords finally appear to be getting the message that outsized rent increases at a time of soft retail sales are not sustainable.

Despite anaemic retail sales growth, landlords of suburban malls – primarily Westfield and GPT Group – have been able to extract rent increases of around 4 per cent to 5 per cent a year for the past few years, well above inflation and defying decreased foot traffic.

But a new report from Citi analysts suggests the tide is turning in favour of specialty retailers. Citi’s Craig Woolford forecasts that retail rents, which have far outpaced sales growth, will grow much more slowly over the next three years at a rate closer to 2 per cent a year.

Woolford estimates that a typical retail lease signed in 2009 has had a cumulative rental increase of 19 per cent, while the store’s actual sales have fallen by 6 per cent, based on industry averages. Those onerous leases signed from 2009 to 2011 will start rolling off next year.

Average growth in non-food retail sales has been recession-like over the past three years at 1.3 per cent annual growth, compared with the 25-year average of 4.7 per cent.

The retailers that should benefit from more realistic rental increases include Premier’s chains Just Jeans, Dotti and Smiggle; Oroton; and Specialty Fashion Group.

Specialty Fashion Group, the owner of Katies and Millers chains, has already taken a stand against landlords and has been prepared to shutter store locations rather than pay outsized rent hikes. As a result, management has said they have negotiated discounts on lease renewals of around 15 per cent.

Prime city rents are a different story; no sign of softness there.  In research that has received surprisingly little coverage, global real estate firm CBRE has found that Sydney, Melbourne and Brisbane are among the top 10 most expensive cities in the world for prime retail rents.

Josh Loudoun, a senior director at CBRE who helps international retailers with their entry to the local market, says the three cities have been in the top 10 for several years.  “International brands are astounded at the rents being paid here,” he says, though strong sales can make the stores among the chains’ most profitable in the world, as is the case for Zara.

Tight supply across the Asian region for prime space, and mostly from international retailers for marquee locations, has helped to push up rents. In fact, Australia was the only country surveyed with more than one city in the top 10 for prime retail.

Retail rents in the Pitt Street Mall now exceed those on the Champs-Elysees in Paris and Milan’s Via Monte Napoleone, according to Colliers, largely because the high cost of building Westfield’s new development has prompted landlords to charge extremely high rents.

No wonder Australian shoppers are on strike at the malls and buy goods online from overseas retailers more frequently than consumers in any other developed country. Of course, consumers are not just shopping offshore on price but on range, quality and availability as well.

More modest rental costs in shopping malls around the country will be one small consolation for struggling retailers, particularly on the clothing front. With the Aussie dollar sitting comfortably in the mid-90 US cent range, shopping offshore at online stores remains affordable and does not appear to have fallen off as much as expected when the dollar fell below parity.

With the imminent arrival of Uniqlo and H&M in Melbourne adding to the influx of international brands offering a vast range of well-priced fashion, smaller retailers need all the help they can get.