Getting the mix right

Across shopping centre formats – regional, sub-regional, neighbourhood – success stories are driven by quality, trade catchment dominance and demographics.

Tony Doherty, Australian head of retail at Jones Lang LaSalle (JLL), says high quality, dominant centres are still performing well, despite the retail slowdown.

“Tenant demand in these centres has remained reasonably strong as tenants seek out the best locations for future trading opportunities,” Doherty says.

“Consumers are not only being more selective about what they buy, but also where they buy. This has resulted in the diverging performance profile between prime quality centres and second tier centres.”

According to figures from JLL, the average retail vacancy rate across all markets and retail formats has increased from 3.2 percent in December 2011 to 3.5 percent in June 2012.

By format, the JLL data shows the average CBD and neighbourhood vacancy rate increased over the first half of 2012, declined in regional centres and was unchanged in the sub-regional sector.

Doherty says the majority of the increase in vacancy was concentrated in secondary centres, which has resulted in some downward pressure on rents.

“Tenants continue to scrutinise their store networks carefully and in some cases are closing stores in underperforming centres… The retail sector is becoming even more competitive, not only for retailers, but landlords as well,” he says.

Doherty says in some cases tenants are negotiating lower rents on renewal.

“This is because, over the past five years, passing rents have risen in excess of market rents. That is, most of the fixed annual increases built into leases have grown at a faster rate than market rents,” Doherty says.

“We are also seeing higher incentives being offered on new leases to attract tenants, particularly in the form of capital contributions to fitouts,” he says.

“Leasing has become more difficult and negotiations are taking longer to conclude, but tenant demand has held up relatively well given the challenging discretionary spending environment.”

Cautious tenants

According to Tony Dimasi, managing director, retail at MacroPlan Dimasi, the leasing landscape has been affected by the challenging retail environment in a number of ways.

“We’re finding more tenants are inclined to perhaps move on rather than renew, or if they’ve got a store that they consider is underperforming, they’re more inclined to not renew, than renew, simply because of the slight lack of confidence that has resulted from the last couple of years,” Dimasi says.

“What we are finding is that there are generally fewer specialty tenants actively considering new locations.

“A lot of [retailers] have tended to put a halt on new store opportunities for the time being, making it more difficult to lease space,” he says.

Dimasi adds that this applies to all centre types, but not to all centres.

“There are still some very strong centres that are having no problem attracting new tenants, but on the whole, certainly there are fewer tenants out there looking at the moment.

“I don’t think it is so much a centre type, it is really more an individual centre … Centres like, for example, Caneland in Mackay was redeveloped, extended and it leased up extremely well. As did Robina on the Gold Coast, as did Clearmont Quarter in Perth.

“They are all basically regional or sub-regional centres, but they leased very well because there were very strong opportunities at each of those locations,” he says.

Dimasi says at the moment there are difficulties, to greater or lesser degrees, across all centre types.

“With neighbourhood centres there are not as many mum-and-dad type retailers taking up franchise opportunities as was the case when retail was travelling very strongly. Therefore it’s becoming harder to lease even the relatively small number of shops that are in the neighbourhood centres,” Dimasi says.

“The sub-regionals haven’t done particularly well, and neither have the non-food specialty stores … so that’s becoming a little bit harder there as well. And the regional centres, the department stores and the apparel categories are a little bit tough.”

Regionals doing it tough

Dimasi says regional centres are arguably worst-off in the current retail trade environment.

“Because of the fact that the discretionary categories have suffered most – particularly department stores, apparel and household goods – it has meant the regional centres have tended to be the ones that have also suffered most,” Dimasi says.

“For the smaller centres, particularly for the neighbourhood centres, the great majority of their business is just supermarket business, and supermarkets have really held up fairly well,” he says.

Flight to quality

Michael Bate, head of retail for Colliers International, says demand still exists for quality space.

“There’s still good demand out there, from a myriad of retail usages and retailers, looking to sit on the front door of a new Coles or Woolworths supermarket,” Bate says.

“Our experience at Colliers is that … currently we’re doing in excess of 10 projects for Woolworths around the country, and we’re finding the take-up on the back of Woolworths’ success and Woolworths’ turnover to be very good.”

Stephen McNabb, CBRE Australia head of research, says ABS retail trade statistics point to varied risks across the sector.

“More defensive tenancy mixes [are] faring better with higher exposure to non-discretionary spending such as food/staples and pharmaceutical spend, while at the other end of the spectrum, bulky goods centres have been impacted more by lower big ticket item spend and a soft housing market,” McNabb says.

Bate says across all categories of retail trade, in simple terms, it is tough.

“Having said that, there are certain categories that are still defying current negative consumer sentiment, and those sectors include travel, food and beverage, and what I refer to as ‘pampering’, so things like perfumes, pharmaceuticals, health … Those particular categories are doing a bit better than the others, [but] they’re still not doing exceptional numbers,” Bate says.

Doherty, on the other hand, says JLL doesn’t describe food as a ‘saviour’ for retail, “but demand in that sector has been stronger than apparel and other discretionary categories”.

“Demand from apparel retailers has been relatively subdued, but we expect this category to recover as the effect of lower interest rates flows through to an improvement in discretionary spending,” Doherty says.

National average vacancy rate

Source: Jones Lang LaSalle

Indicative rent, as at June 2012

Source: CBRE

Top 10 shopping centres by moving annual turnover

Source: Savills Research

Top 10 retailers by moving annual turnover

Source: Savills Research