Australia | Jul 04 2013
-Retailer turnover to stay soft
-Lower Aust dollar affects margins
-Shopping centre income lags
-Retail property yields only modest
By Eva Brocklehurst
Retail property is under more pressure than on first appearance. The online threat to individual bricks and mortar retailer sales has been widely flagged but there is pressure on shopping centre incomes and yields. This may come as a surprise because retail property has been highly sought after by investors and interest has been strong in 2013. Money is being spent on upgrading shopping centres and development is continuing apace after stalling post the GFC.
Nevertheless, the findings of the Retail Property Market report from BIS Shrapnel suggest the outlook for retailers is quite modest and bustling shopping centres are unlikely to be a feature for the rest of this decade. It's not just sales but income and margins that are affected.
Retail property is facing a challenge that is the biggest since the fall-out from the GFC and turnover growth is likely to be modest for the next decade. According to report author Maria Lee there are two key drivers of growth which are absent at present. There is no economic boom and a there have been marked falls in the savings ratio, which is the proportion of income that households spend rather than save. Besides the online drawcard, spending patterns are also changing as the population ages. Older folk spend less on goods and services. Exacerbating the challenges for turnover is the strong level of shopping centre development with a peak in commencements anticipated in 2013/14. This is expected to spread the retail dollar even more thinly.
The report expects the online share of retailing will increase to 11% in five years from the current 6%. Ms Lee estimates turnover growth through shopping centres would have been a full percentage point higher without online, a highly significant factor. There's another impact from the proliferation of online information. Margins are being squeezed as consumers use comparison websites or apps on mobile phones, when in store, to demand a better price.
The online trend is the main headwind but there is another. A substantial depreciation in the Australian dollar. This may be expected to boost retail turnover as less expenditure leaks overseas via online and locals don't holiday overseas as much while visitors find the place more attractive, but it is not so simple. It is offset by the negative impact on retailer profit margins, Ms Lee notes. The report has calculated the lower currency's impact on retailer profitability and, hence, retailers' capacity to pay rent.
"Based on our forecasts of a 23% depreciation [of the currency] against the Trade Weighted Index, we estimate that a retailer which imports 50% of product sold will see its profitability fall to zero if it is to continue to pay current rents," Ms Lee said. "Clearly this is not sustainable. This will impact their ability to pay rent, and vacancies could also be expected to rise."
BIS Shrapnel forecasts shopping centre incomes to grow at an average pace of just 2% per annum over the next five years. This will not keep pace with CPI inflation.
The weaker prospects for income growth have implications for total returns on retail property. The report does not see yields on retail property getting back to the levels of 2007, at least during this decade. BIS Shrapnel acknowledges strong overseas investor interest may be underpinning firmer retail yields but suspects these investors are unlikely to be so aggressive when the Australian dollar is lower, particularly if bond yields rise.
It's not completely bad. BIS Shrapnel considers the stronger retail centres are good cash flow businesses, with relatively little fluctuation in income returns. They're just not spectacular.
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