Tenants' winter of discontent

The unseasonably warm weather has placed pressure on sales of winter clothes at retail tenants which could lead to more downward rent reviews.

The unseasonably warm weather has placed pressure on sales of winter clothes at retail tenants which could lead to more downward rent reviews.

Already, retail landlords such as Westfield have said rents for new leases in its specialty stores have declined up to 5 per cent.

The impact from slowing sales on anchor stores in shopping malls is less of a factor in the short term as they have long leases, but if the trend continues landlords will likely also be reassessing leasing contracts for the big box tenants.

In general, anchor stores account for about 5 per cent of the total rent roll at a mall, but with the specialty stores sales under pressure, landlords could face store closures as tenants consolidate sites due to lower sales.

Anchor department stores and discount chains work on a combination of turnover rents and sales hurdle rates, but analysts say they are unlikely to have achieved these rates, leading to more discounting of stock via clearance sales.

Last week Wesfarmers, the owner of Target, said the discount store's earnings had been hit by factors including "a late start to the winter season impacting sales and margins".

The results were also hit by a higher level of clearance sales, higher than expected shrinkage rates and increased costs associated with restructuring. Target's earnings before interest and tax for the 2013 financial year are expected to be between $140 million and $160 million.

Target stores are set for an overhaul, following the lead of its competitors Kmart and Big W, and that should lead to improved sales, but the revamped stores may have to be re-leased at lower rents to reflect the weaker retail sector.

UBS analysts said given the warmer weather had continued into the fourth quarter, they expected further pressure on sales and profit margins.

"While some of the downgrade is likely company-specific, we expect the warmer weather is having an impact on the market and will therefore put further pressure on re-leasing spreads and comparable net operating income growth for discretionary anchored malls," they said.

"As we detailed, following Westfield's quarterly update, key operating metrics in Australia deteriorated including: re-leasing spreads down 5 per cent (versus -0.5 per cent in the previous corresponding period of 2012), and lease deals completed during the quarter declined 36 per cent from ... a year ago."

Overall, the average specialty rental growth for Westfield was 2.4 per cent, compared with 3.1 per cent growth in the previous corresponding period.

Shaun Cousins at JP Morgan said the warmer start to winter was a negative for apparel retailers and brand owners. It was likely to weigh on sales in the near term with a further negative impact on gross margins as discounting was required to clear product.

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