RICH PICKINGS: A giant worry for Lowy

Last month Frank Lowy stepped down as the executive chairman of Westfield Group, after a staggering 50 years driving the company to become one of the world's most successful shopping centre groups.

Lowy has handed control to joint chief executives Peter and Steven, while his other son David continues to run the company's private investment company, LFG Holdings. He will remain actively involved in the group as non-executive chairman, but his retirement from an official day-to-day role comes at an interesting time for the group.

In Australia, an almost unprecedented level of consumer caution is weighing heavily on retail sales. A number of major retail chains – including Westfield tenants Colorado Group, Borders and Angus & Robertson – have collapsed. In Westfield's other major markets, the United States and Britain, consumers are only slowly coming out of their shells.

It's a difficult time to be a landlord, which is why Westfield's shares remain around 30 per cent lower than 12 months ago. Yet Westfield is remaining upbeat. In late May, the company upgraded its development pipeline and is aiming to spend $1.25-$1.5 billion in 2012 and 2013, after pulling right back on spending between 2008 and 2010.

It's a sign of the Lowy family's confidence in the future of the business, which will surely enjoy more investor support as the economy improves and consumers start spending again.

But the backdrop against which this development takes place is gloomy to say the least.

Putting consumer caution to one side, one of the big reasons cited for the collapse of these chains has been the rise of online shopping, which is expected to account for somewhere around 10 per cent of all retail spending within five years. Exactly how this will affect retail landlords is unknown, but it does appear that store sizes and formats are shrinking. The days of giant tenancies – such as a big Borders store – could well be over.

However, this might not actually be as big a problem for Westfield as it appears.

Smaller store formats would allow Westfield to get more tenants into each of its centres, thereby increasing its client base, spreading its risk and potentially getting a better return per square metre than it would with a big tenant.

It will be very interesting to see how Westfield spends its development money and whether any of these big-picture trends (such as retail sales) are reflected in centre makeovers or extensions.