Australia | Aug 23 2011
– Slowest rate of retail turnover growth will not remain in place forever, argues BIS Shrapnel
– New report suggests solid returns should be achieved despite touch conditions
– Improvement in consumer spending to help boost returns
By Chris Shaw
The current economic environment has resulted in the slowest rate of retail turnover growth in Australia in decades, with spending increasingly occurring online and in overseas markets as consumers turn to the internet rather than shop in bricks and mortar locations.
But as BIS Shrapnel suggests in its Retail Property Market Forecasts and Strategies 2011-2021 report, the retail property market should still generate solid returns despite the current market turbulence.
BIS senior project manager and report author Maria Lee suggests the major issue for the retail property market at present is sentiment, as poor market and economic sentiment has pushed household savings to a 24-year high.
While the savings rate is increasing, consumer spending won't keep pace with household income growth but at some stage Lee expects the savings rate will level off, meaning the pace of consumer spending and retail turnover will improve.
The timing of any such pick-up remains uncertain in Lee's view, as the current negative news flow suggests consumer spending could stay weak for several months. Eventually though, Lee expects as the mining boom gains traction and so underpins firmer economic growth in Australia there will be a boost to household spending capacity.
This should prompt consumers to loosen their purse strings, so generating stronger growth in retail turnover. Lee expects this improvement will become apparent through 2012.
On BIS Shrapnel's forecasts, long-term retail turnover growth should average more than 3% annually in real terms. Such an outcome would be double the pace of growth seen in 2010-11 but would be well below the 4.4% annual growth recorded in the decade to 2007.
Lee warns there is a big difference between aggregate retail turnover growth and turnover in regional and sub-regional shopping centres, with a further step from shopping centre turnover growth to centre income growth.
Dilutionary influences include internet shopping, growth in retail floorspace, high occupancy costs, over-rented tenancies, the need for leasing incentives and pressure on the capacity of retailers to pay rents stemming from any possible slump in the Australian dollar.
It is Australian dollar strength that is saving retailers at present according to Lee, as it is allowing the retail sector to engage in competitive price discounting while retaining high profit margins relative to historical levels. Lee estimates average profit margins are now around twice the level achieved in the 1980s and 1990s.
Much of the pick up in profit margins in recent years can be attributed to the stronger Australian dollar, suggests Lee. Given the assumption AUD should stay relatively strong, Lee expects shopping centre incomes will remain mildly ahead of the rate of inflation.
In investment terms Lee anticipates only a mild firming of retail yields in coming years, with yields overall expected to remain below pre-GFC levels. This implies retail returns are now depending more heavily on income returns and growing shopping centre incomes.
Overall, Lee expects modest income growth and some firming of yields, which should combine to see prospective total returns at low double digit levels. BIS Shrapnel would regard such an outcome as solid performance.
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