Trends in Small Business Retailing

By Simon Fonteyn BCom, Assoc Dip Val, MMgt, AAPI, Managing Director Leasing Information Services, and

Domenic Marino BProp Econ (Hons), RICS, Property Consultant, IPS Consultants Pty Limited

Presented to the Australian Small Business Summit

Retailing for the independent small retailer is one of the toughest businesses in Australia, right up there with farming. For even the larger specialty chain retailers, the prospects are patchy and are State dependent.

So why are the independent retailers prospects so tough and how do these prospects vary between certain States?

Revenue Growth

Source: ABS February 2007

There has been moderate trend growth for the past 15 months in all sectors of retail trading in Australia (excluding hospitality and services).

Food Retailing

Source: ABS February 2007

Food retailing has been the standout performer as it has had at least 15 months of moderate growth. New South Wales has had eight months of moderate growth, Victoria has had two months and Queensland has had five months.

Clothing and Soft Good Retailing

Source: ABS February 2007

Clothing and soft good retailing has had weak trend growth for the last four months. New South Wales has had three months of weak trend growth. Victoria has had two months of moderate growth following six months of strong trend growth, while Queensland has been in decline over this period.

Other Retailing

Source: ABS February 2007

Other retailing is defined by the ABS as the retail sale of; pharmaceutical, cosmetic and toiletry retailing; antique and used good retailing; garden supplies retailing; flower retailing; watch and jewellery retailing. Other retailing has had six months of decline in trend growth. New South Wales has had six months of decline; Victoria and Queensland have had eight months in decline.

State Trends

New South Wales

Source: ABS February 2007

New South Wales has experienced moderate trend growth for the last four months. Food retailing has been the standout performer with eight months of growth.

Victoria

Source: ABS February 2007

Victoria experienced weak trend growth in February 2007 following five months of moderate growth. Food retailing, clothing and soft good retailing have had two months of moderate growth, while other retailing was in decline.

Queensland

Source: ABS February 2007

Queensland has experienced moderate trend growth for the last three months. Food retailing has had moderate trend growth for five months, while household good retailing has had ten months of strong trend growth.

Occupancy Cost Survey

Research undertaken by Leasing Information Services using a survey method of approximately 30 national retailers found a strong trend of decreasing occupancy costs in Queensland. Occupancy costs are defined as the ratio of total rent, outgoings and promotion levy as a proportion of total sales. This trend was due to increasing sales growth and rental costs that were below the levels of NSW major centres. However, the survey also revealed that rental growth in the major centres in Queensland, such as Brisbane, Cairns, Mackay, Toowoomba, had been escalating rapidly to the point where they were within 10% of NSW city based centres and above NSW regional based centres.

Overall, there was a much stronger positive sentiment towards retailing in Queensland versus NSW and Victoria.

Rental Increases in Major Shopping Centres

Major shopping centres continued to pursue very aggressive revenue growth targets across their portfolios, regardless of recent retail turnover trends. A recent survey by Leasing Information Services found that the average rental increase per annum across all major regional centres covered is approximately 4.5% per annum of net rent. This is due in part to the trend of shopping centres to provide fixed annual reviews with no provision for market reviews during the term of the lease which normally equates to five years. This means that a tenant who was paying an average of say $1,500/m2 Net at the commencement of their lease, would be paying $1,788/m2 Net on the final year of their lease, plus and average of 5% of net rent per annum promotion levy, plus outgoings in the range of $50-$100/m2. The result has been a steep upward pressure on occupancy cost, causing major concerns for retailers.

Rental Increases at Expiry of Leases

For those tenants who has a lease which expired within a major centre, the overwhelming majority are subject to negotiations with the landlord on the basis of their fit-out and goodwill being in place. However, with no mechanism for an independent market review, the landlord provides an estimate of their opinion of market rental, which can vary between 30% and in some cases 100% of the current passing net rent of the sitting tenant. This situation is exacerbated in certain states where retail rental information is not registered. See Table 1 (below):

NSW	Section 15 of the Retail Lease Act Requires registration of all leases within one month of stamping.
VIC	Requirement to notify the Small Business Commission of the commencement, parties to the lease, expiry and option. Information is not publicly available and does not include any rents and areas.
QLD	Under Section 64 of The Land Titles Act 1994 (QLD), a lease may be registered and the landlord holds its interest subject to the registration of leases within the lot or part of the lot. The majority of retail leases are registered in QLD.
ACT	A lease may be registered under The Land Titles Act 1925 (ACT).
WA	A lease for a term of more than 3 years may be registered under Section 91 of The Transfer of Land Act 1893 (WA). There are no circumstances in which are lease must not be registered.
NT	There is no requirement for any lease to be registered.
SA	There is no requirement for any lease to be registered.
TAS	There is no requirement to register a lease under The Land Titles Act 1980 (TAS). A lease for a term of more than 3 years may be registered; however a term for less than 3 years is not registrable.

The only states where reliable registered data is available, are NSW, QLD, ACT and NT. The other states have almost no available information.

For those states where registered data is available, tenants are able to utilise a database of registered leases from information portals such as: www.leaseinfo.com.au to better negotiate rental terms.

Implications

The lack of uniformity between the states creates a template for the desegregation of information by landlords, to the extent where comparative rental analysis is very difficult. The larger chain retailers tend to share information, however, the smaller independent operators who do not have established retail network are extremely vulnerable.

Record Low Vacancy Rates

The vacancy levels across major shopping centres appear to be at record low levels. This in part is fuelling continual rent increases as landlords are able to benefit from the excess of demand over supply. With virtually no major new Greenfield development opportunities, current owners are adopting the trend of refurbishing and extending their existing centres to further capitalise on the low vacancy rates.

Record Low Yields

Major shopping centre yields continue to compress at astonishing levels, in some cases, well below the current cost of debt capital. For example, GIC Real Estate, owned by the Singapore government, accepted a yield of 5 per cent for a 50% stake in Westfield Parramatta in May 2007. These yields are unprecedented in Australian shopping centre history and indicate a perceived massive rental and capital growth potential for these assets which are in the regional to super-regional category.

Key Strips vs Major Centres

Based on research undertaken by Leasing Information Services, certain key strips, such as Oxford Street Paddington and Double Bay retail precincts in NSW have experienced negative rental growth in the past two years by approximately 20%. This in part has been a result of market cannibalisation by Westfield Bondi Junction and a reduction in turnover growth of the fashion category, who are the primary demand drivers for these strips.

Conclusion

Whilst the retail sector as a whole continues to improve, in particular the food sector continues to outperform the other retail groups, there still appears to be an imbalance between sales growth and occupancy cost increases. This situation appears set to continue as major centres pursue relentless rental growth, spurred on by record low vacancy rates.

It is imperative that State and Federal governments look at improving information flows within the retail sector via a uniform lease registration system, which allows for comparative rental analysis across sectors and states.

Retail and associated employment groups, such as franchising, independent owned stores and multi-national corporations are a major employer in Australia and requires the respect and protection from State and Federal Governments for the future prosperity of the country.

References

Australian Bureau of Statistics (ABS), Feb 2007, Retail Trade Accessed on 28th May 2007.

Leasing Information Services Pty Ltd

Big Yields for Regional Centres, The Australian, May 2007, Accessed on 28th May 2007