For Gerry Harvey, it’s never been a more challenging retail and property development environment. He talks to Amal Awad about how his business is diversifying.
Gerry Harvey, chairman of Harvey Norman Holdings, has been developing properties since his early 20s. While best known for his retail businesses – Harvey Norman, Domayne and Joyce Mayne – his property portfolio has a current value of about $2.2 billion, and he’s been involved in “every single bit of that”.
More specifically, Harvey Norman Holdings owns, occupies, develops and leases property.
“It’s mostly all bulky goods centres, which Harvey Norman shops occupy, and we lease to other bulky goods outlets,” says Harvey.
It’s a method that has always worked better for Harvey than leasing shopping centre space. “We have been and we are in some Westfield centres and other shopping centres. In the main they don’t work nearly as well as ours.”
The primary reason is that “destination shopping” for electrical, furniture and bedding is more suited to bulky good centres where there’s a lot on offer.
The focus has been to own properties, and it’s an interesting – and successful – business model for Harvey Norman. And while Harvey has tweaked it over the years, he says the approach hasn’t inherently changed since he first got into the business over 50 years ago.
“I’ve varied the model slightly but I’ve still got it going in much the same form … And it’s fairly unique in the world, and sure it’s different, but the fundamentals are not that much different.”
For Harvey, an ideal property development is to buy “a great big block of land”, then build a Harvey Norman store, 15 other shops and a big parking lot upon it.
“[It] costs you, say, $40 million, and it’s worth $50 or $60 million the day you finish. And then you have the Harvey Norman franchisees in that shop.”
Franchisees include electrical, bedding and furniture departments, all of whom would pay rent.
“They’re all separate businesses,” says Harvey.
While Harvey has no qualms about discussing the challenges of retail property and retail itself, he shrugs off the threat of online retail – the company only sells a small amount of product online, and Harvey believes the bulk of the offerings aren’t suited to an online market.
“Online is hyped in the media ... But it is growing, and every year it grows and everyone’s online, but mostly in the product we sell, which is furniture and bedding, there [are] no online sales,” he says.
“We’re going through a very difficult time in retail at the moment – like most retailers. Coles and Woolworths in food, and Bunnings in hardware, I think they’re having a nice soft run. They’re complaining, but they’re having a nice soft run.”
There is something to his candour, and you perhaps don’t expect any less from a man with so much experience under his belt. Harvey will be imparting some retail property wisdom at the Property Council of Australia’s The Property Congress in November, in the panel session ‘Learning from the Legends’.
“I don’t like being the oldest person in the room, but I have a lot of experience. I’ve lived through all of these things, so I can say to people ‘I’ve seen more than you’ve seen’.
“Now I don’t think that makes me any smarter than them … but I have seen a lot. And the interesting thing is that you never can tell the future. You can have stabs at it. No one saw this global financial crisis coming. I didn’t see in real estate … that I’d be building things and having them valued at less than what they cost me, I didn’t see that.”
Most startling for Harvey is that Australia’s economy is relatively strong, with approximately 5 percent unemployment and very low interest rates.
“Somehow or other, you can either give up or you can somehow come out the other end. And you’ve got to come out the other end, and that’s the challenge.”
He is candid in acknowledging that times have most certainly changed.
“In the area that we’re in, it’s just never been worse; with no sign of anything changing,” he says.
In order for the situation to improve, Harvey says building and land costs have to come down, and rents will need to rise between 20 and 40 percent.
“It’s not that business is so bad, it’s just that you can’t make money out of … these sorts of property deals. And if you do the upmarket ones they’re too hard, no one’s touching them. They’re doing $600,000 apartments and house and land packages, they’re probably the only things selling,” he says.
“You develop luxury and try to sell it – it’s very difficult. I’ve got a couple in the Eastern Suburbs I can’t sell and they’re $3-$4 million each.”
In fact, Harvey says all of the company’s retail property developments have come to a “screaming halt”, because developments come out at a loss.
“You can’t do a property development, it’s nearly impossible.
“You’ve got to take the view that this is not sustainable, because no one’s going to build anything. The only two … that are out there building at the moment are Bunnings and Woolworths.”
But Harvey points out that it’s not a finance issue.
“Finance is cheaper than it was before when we were making the money. This is just a simple case of: if you build it, you’ll lose money. You’ve got a huge incentive not to build.”
This has led to some diversification for Harvey, who is involved in the development of mining accommodation in Queensland.
“You’ve got this very strange situation, which we’ve never had before because you’ve got … a two-speed economy, you’ve got the mining and resources sector extremely strong. Now we’re involved in that, I do Dongas.”
Harvey says he is heading towards having 2500 demountable accommodation units for miners, designed to house the fly-in fly-outs.
“That’s an area in real estate at the moment that is very good. And there are a lot of people looking at going into mining accommodation,” he says.
Harvey is as philosophical as he is practical about life and work experience, and points to the under-30 and -40s generation as the ones to watch.
“If you go back and have a look at all the great experiments, medical breakthroughs, successful business people, everyone – under 30’s a good place to be. History is littered with these people that changed the world when they were young.”
As for learning from others’ mistakes, Harvey says he observed successful people who “went broke” when he was in his 20s and vowed it would never happen to him.
“They all went broke, mostly, because they lost interest. Their businesses would grow into such and such a size, they lost interest in their business, put someone else in charge and went broke. They never had the passion and commitment …”
He reflects on the shift in the retail environment – once the playground of department stores and independent hardware stores.
While the odd store is still around, many others aren’t because they wouldn’t change.
“You’ve got to try and say, what’s going to happen in 10 years from now? Where do I see the world in 10 years? So I’m much more interested in that than what happened 10 years ago or what’s happening now. My mind pursues that avenue.”