Jeweller - August 2020

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RE A L ESTATE GI A NTS Australia’s Largest Retail Property Groups by Gross Lettable Area It’s a conclusion supported by the KPMG paper, which notes, “Even if COVID-19 is quickly resolved, retailers and landlords will need to ‘lean in’ to create a new and more sustainable retail business model, which in turn will require adaptations to the property model.” Given the impact of the pandemic, the questions to be answered remain: what will the retailer-landlord relationship look like, post-COVID, and how can retailers shift the balance toward more favourable terms? Examining the retail landscape According to analysis by the Retail Doctor Group’s Brian Walker, Australia has 1,338 shopping centres, which comprise 85 per cent of stores and attract 85 per cent of overall shopping visitation. These shopping centres are, in the main, owned and operated by real estate companies including Scentre Group, Vicinity Centres, and Stockland, many of which are publicly traded. ASX: SCG 37 shopping centres in Australia and 5 in NZ Approximately 3.8 million sqm lettable retail space ASX: VCX 64 shopping centres Approximately 2.5 million sqm lettable retail space officer of large chain The Jewellery Group (TJG), which operates 67 stores under the Mazzuchelli’s and Zamels brands. Notably, TJG’s store count has decreased dramatically since 2010, when it operated more than 120 stores. When asked about the challenges of negotiating leasing agreements, he said, “Landlords were unilaterally considering only their property valuation and returns, with less scope to look at the retailer’s commercial viability of operating the store.” He added, “There was lots of pushback in negotiating the multiple stores as one portfolio, as they were stating that each store has different cost dynamics and the owners’ expectations were different.” When negotiating the terms of a lease, the retailer has historically been at a disadvantage, with Ryan noting that retailers have often had to supply trading information to landlords “only for them to turn around and use that information to negotiate onerous terms based on a percent-of-sales formula”. 85% OF RETAIL VISITATION TAKES PLACE IN SHOPPING CENTRES Ideally, the relationship between retailer and landlord is one of mutual benefit; while the latter collects rental income, the former is meant to enjoy increased and highquality footfall as well as reduced occupancy cost. Yet it is not always so. Frank Salera, director Salera’s – a jewellery chain which has been dealing with landlords since 1953 and operates 20 stores across Victoria and Queensland – observes, “The key challenge is that landlords seek to maximise the returns to their shareholders, who expect year-upon-year increases – and this objective is irrespective of the challenges of increasing retail performance, which is often declining. “This results in a situation where now, more than ever, retailers are required to ‘throw the keys on the table’ [threaten to vacate] before the landlords will consider a rent that affords the retailer a minimum return on investment.” It’s a perspective shared by Balaji Sambasivam, chief financial ASX: SGP 35 shopping centres Approximately 1.02 million sqm lettable retail space QIC Global Real Estate Government-owned 13 shopping centres ASX: GPT 12 shopping centres Approximately 960,800 sqm lettable retail space “The key challenge is that landlords seek to maximise the returns to their shareholders, who expect year-upon-year increases – and this objective is irrespective of the challenges of increasing retail performance, which is often declining.” Frank Salera, Salera’s Zahra also describes another “information imbalance”: “Smaller retailers, in particular, don’t fully know their rights and what they can ask for. Landlords are in the business of collecting rent, whereas for retailers, rent is just one of many parts of the business they need to manage.” Additionally, many Australian states and territories have required a minimum five-year term for commercial leases. While providing stability for retailers and security for landlords, these terms have made it more challenging for retailers to respond to downturns. As a result, several states have taken steps to amend the legislation governing commercial leases. “In NSW, which accounts for about a third of all Australian retail, there used to be a requirement of minimum five- 32 | August 2020
Retail Rent Review | STRATEGY FEATURE NO RESOLUTION OUTCOME ALTERNATIVE FUTURE: THE RETAIL LANDSCAPE If current trends continue unabated, without a flexible and reasonable response from landlords, the retail landscape in Australia could look dramatically different in the coming years. Overall, retail footfall has been in decline since at least 2017 and at an accelerating rate – which will likely continue as e-commerce penetration increases. Yet over the same period, rents have increased, on average, by 4–5 per cent per year, according to LeaseInfo Group managing director Simon Fonteyn. Tellingly, the vacancy rate across Australian shopping centres reached its highest rate in more than 20 years – 5.1 per cent – in June 2020, according to data from commercial real estate firm JLL Australia. For CBD-based shopping centres, the vacancy rate is at more than 10 per cent. Shopping precincts and strips have fared even worse; an analysis by real estate advisory firm Plan1 Project Management found that Melbourne’s Chapel Street had a vacancy rate exceeding 20 per cent in June 2020. Across the city’s 11 major retail strips, the vacancy rate was 12.3 per cent, an increase of more than 4 per cent when compared with 2018. Speaking at the Australian Financial Review’s Virtual Retail Summit earlier this year, Julia Forrest, a portfolio manager at investment firm Pendal Group, speculated that vacancy rates would likely increase further, and that more retailers would opt for holdovers – month-to-month contracts – rather than long-term leases. Peter Ryan, director of retail consultancy RED Communication, says “The economic reality is that we face an extended period of poor market conditions with some economists suggesting the impacts could last a decade or more and that we have not seen the worst of it yet.” “The economic reality is that we face an extended period of poor market conditions with some economists suggesting the impacts could last a decade or more and that we have not seen the worst of it yet.” Peter Ryan, RED Communication However, Ryan believes “online is only part of the solution” and that stores will “regain their position as the centre of the customer relationship – [but] when that happens though is the critical question.” Without a sustainable reduction in rent, Ryan says retailers will face increasing pressure to exit tenancies. Meanwhile, Fonteyn argues that shopping centres will not disappear from the Australian landscape – but that they will be “forced to change”: “Their model is getting shoppers in, getting them to spend, and getting them to stay as long as possible. “After COVID-19, that has to be readjusted. There will be another iteration of different types of use within shopping centres.” He adds that shopping centre owners are constrained by strict planning laws. “It’s not that easy to introduce new shopping centres. “There have been a couple of new centres built [in the past 10 years], but the majority have been there for decades and have simply expanded their trading area.” However, the shift toward mixed-use, including residential, offices, services, and lifestyle, may be hampered as consumers increasingly opt to avoid crowded spaces due to safety concerns. Additionally, the KPMG white paper Beyond COVID-19: The Shifting Foundation of Retail Property notes that ‘destination shopping’ at large-scale centres is in decline, with consumers increasingly preferring to spend locally in what is referred to as ‘village shopping’. At the same time, replacing tenants has become “increasingly difficult”, with landlords “having to work much harder to attract new tenants and repurpose their centres to make them relevant to their communities.” In order to justify rental costs, the report’s authors suggest that landlords provide “supporting infrastructure” for retailers who are moving toward omni-channel sales, such as “kerb-side pick-up zones, dark stores/floors, shared click and collect counters, or parcel lockers”. If these changes do not occur, the value of shopping centre assets will continue to decline – as will the Australian retail sector. August 2020 | 33
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Jeweller - August 2020

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