Pressure is mounting on retail landlords to lower costs for tenants, not just in rent but also marketing, maintenance and upkeep of general pedestrian areas as more shopkeepers buckle under the weight of poor sales.
Bernie Brookes, the head of Myer, which anchors close to 90 per cent of all major shopping centres across the country, warned of tough times ahead, singling out high wages, rents, taxes and utility costs, on top of flat sales.
Westfield has said that rents for new specialty stores were being signed at up to 10 per cent (average of about 6 per cent) lower than existing contracts, while other landlords such as GPT, which owns Highpoint in Melbourne, and CFS Retail, which owns half of Chadstone, have also warned that rents were rising at a very minimal range to avoid tenancy bankruptcies.
To a certain extent, the traditional anchors of malls - larger department stores, discount department stores and supermarkets - pay smaller rent as it's spread over long term leases, between 15 to 20 years. But they pay occupancy costs to the landlord, which can be as high as 18 per cent. As a general rule, occupancy costs are charges that include real estate taxes, personal property taxes, insurance on building and contents, depreciation and amortisation expenses.
In the recent earnings results for the major landlords, those costs were an average 16 per cent. Westfield was 19.6 per cent, CFS Retail was 17.3 per cent and GPT was 18.2 per cent.
According to John Kim, of CLSA, mall owners will be defensive investments from an occupancy perspective, but are factoring negative 7 per cent re-leasing spreads through to 2017 as international retailers require larger formats at lower rents per metre.
Mr Kim said Westfield's Australian specialty leases generally had the inflation rate plus 2 per cent annual increases embedded in the leases, so the only way for it to reduce occupancy costs for its tenants was to offer a lower initial rent and higher incentives.