eCommerce and Australian Retail Real Estate

Products in Australia are comparatively expensive

When your typical product in a shopping mall store has inbuilt rent at 20%, plus energy costs, wages, import duties and a profit margin, there is a substantial price differential to the virtual world. Consider just the rent: is it reasonable that the nice shirt you like for $100 in store has $20 built in for the Landlord? That’s about a 10% disadvantage from most of our international peer countries! Prior to online penetration, Australian retailers were able to simply pass these costs on to the unsuspecting and isolated Aussie customer.

The internet has flattened that proposition.

So, high domestic prices, a strong Aussie dollar, cheap (or free) shipping and increasing e-commerce awareness creates a perfect storm for traditional retailers. All humans love a bargain, even more so to brag about it, so it’s only reasonable to assume that whilst the dollar remains high and domestic prices remain high also this trend will continue. Witness the popularity of ASOS, which recent reports indicate sells something to an Aussie every six seconds, and flies four jumbos a week to Australia!

Let’s consider the real world retailers' plight: wages, electricity, taxes are all pretty inelastic. Cost of goods and rent a little more flexible. The high dollar has helped with buying, and most good retailers have already eked out supply chain efficiencies, so limited joy there. On the rent side, any given retail lease has typically five years' duration with fixed increases, so you only get to renegotiate every five years - limited joy. That said, retailers are baulking at increases and actively negotiating decreases or more favourable terms (think fit-out contributions and cash incentives). Even so, stores are closing, and retailers are failing in increasing numbers. One only has to do a Google search to read about retail failures.

What is the impact on shopping centres?

Retail real estate is a dynamic asset. Prime retail assets are predominantly owned by investors who understand supply and demand dynamics. Although acting like oligopolies, the smart owners can read the tea leaves and are positioning assets to incorporate more experiential retailing that can’t be replicated online, or installing retailers that are more vertical, and which make a margin however the product is sold (think H&M, Uniqlo, Zara, Hollister, Apple). This is typically happening at the super regional end.

That said though, rental growth here is constrained. The days of rental growth far outpacing sales growth are over. Regional Landlords are not dim, and are adjusting commercial terms to meet demand - they know they can’t afford to have vacancy, which spreads like a cancer.

At the other end of the spectrum, convenient and neighbourhood centres should fare OK. People are less likely to buy their everyday goods and services online en masse whilever it’s convenient to pop in to the supermarket on the way home from work.

Where is the stress?

The middle ground and high streets is where we see the stresses. Subregional centres or dated underperforming regional centres essentially replicate the super regional offer or the neighbourhood centre offer, but without the sizzle. In general they are homogenous, unexciting boxes. Many of them tend to be owned by investors or syndicates without the deep pockets of the super regional landlords, and are thus less able to invest the capital to keep their property relevant. If there’s a tired subregional or regional in the shadow of a super regional, with a convenient neighbourhood centre nearby, expect vacancy to rise, rents to fall, or yields to unwind. As for many high streets, prospects there are likely worse. With a lack of cohesive management, capital starved owners with divergent objectives, fragmented retail mix, and typically poor parking, this asset class is at risk. Witness the decay (and consolidation) of Oxford Street in Sydney as a precursor of things to come. In many strips retailers can name their price. It’s back to the fundamentals of location, location, location to determine those strip shops that will be better insulated.

Retailers should not be reviewing their network strategy as a pure real estate proposition. With the increasing penetration of online, there is the significant potential for click and collect, with the store acting both as a retail sales point and a mini distribution hub. An online presence can actually drive people to stores, creating up sell opportunities. The question for the retailer then will be which stores to keep, and which to divest. Reading the above, it’s not hard to imagine.

That said, Retail is not dead. People are social creatures. People like to shop. Retail will adapt, as it always has from the most primitive wet markets to today. It’s just a matter of at what price, and at what consequence to the current property landscape.