Australian retailers to benefit from softening mall rentals

Melbourne Australia’s biggest shopping centre operators, Westfield Group, Stockland and GPT Group, are lowering rents for new stores while existing tenants call for cuts as major-mall sales drop for the first time in a decade. Myer Holdings Ltd. will close as many as a quarter of its outlets as leases expire if rental costs, estimated at 52 per cent higher than those paid on average by New York-based Saks Inc., aren’t cut.

Premier Investments Ltd. is closing 50 shops and seeking lower rents at remaining sites that pay triple The Gap Inc.’s estimated average global rent.

“The pressure is going to mount on landlords,” Tony Sherlock, head of property research at Morningstar Inc., said. “Landlords are able to replace existing tenants, but the new tenants may not be willing to pay the same rent.”

A lack of new supply and an economy that has skirted the global recession has ensured Sydney and Melbourne are in the top 10 most expensive places in the world to rent shops. Sydney is the third-most expensive city for prime retail rents after New York and Hong Kong, and Melbourne is the eighth priciest, according to a November report from CBRE Group Inc.

Rents at major malls in Sydney haven’t declined since the Los Angeles-based property broker started records on the city in 1981, while Australia-wide rents haven’t dropped since 1997.

Rents for medium-sized malls

The priciest retail rents in Sydney cost A$13,560 (Dh48,400) a square metre in the three months ended September 30, CBRE said, versus $15,244 (Dh55,987) in New York. Rents for Sydney’s medium-sized malls fell in the three months to March for the first time since 1999, CBRE said.

Australian retail sales unexpectedly fell in April for the first time in 10 months. Spending at department stores led the decline, dropping 1 per cent, the Bureau of Statistics said.

Stockland, Australia’s biggest diversified property trust, cut rental costs by an average 21 per cent in the six months to the end of December for the 10 stores that replaced tenants who went into administration, according to a company presentation. An additional 81 expiring leases resulted in rent cuts of 2.8 per cent for their replacements, while the 102 stores renewing their leases paid 6.1 per cent more.

“It’s economically favourable to retain a retailer than to replace them,” John Schroder, Stockland’s head of commercial property in Sydney, said.

Pinching pennies

Australia’s A$240 billion retail industry is pinching pennies as households increase saving to double the US rate and the Australian dollar’s 23 per cent surge in the past three years drives purchasers online. Consumer sentiment has been negative for eight out of the last 11 months, according to a survey by Westpac Banking Corp. and the Melbourne Institute.

Online spending by Australians rose 15.5 per cent in the year to April compared with a 4.1 per cent increase at stores, according to a May 28 report by National Australia Bank Ltd.

Cheaper leases

Still, near-full malls helped shopping-centre operators boost total rental income last year even as they gave new tenants cheaper leases and offered moves to smaller shops.

GPT’s leasing spreads — a measure of the rental rates on newly signed tenants compared with those of existing stores — fell 6 per cent from a year earlier in the three months to March 31, it said on May 2. The occupancy rate was 99.4 per cent.

Rents rose across 88 percent of GPT's malls, with an average increase of 4.5 percent in the year ended December 31, the Sydney-based company said in its annual review March 7.

“Shopping centres continue to evolve with the wants and needs of customers,” Brett Williams, retail portfolio manager at GPT, said in an e-mailed response to questions from Bloomberg. “A great example of this is the strength of the entertainment and restaurant precincts within shopping centres today.”

First decline

Leasing spreads at Westfield were down 1.5 per cent in the first quarter, co-chief executive officer Steven Lowy said.

Westfield, whose biggest tenants are Myer and department store David Jones Ltd., said more than 99.5 per cent of its space in Australia and New Zealand was leased at March 31, with a specialty-store rental increase of 3.1 per cent in the year to March. Department store sales in Australia fell 5.2 per cent from a year earlier.

“The better centres are always better centres and the struggling centres are struggling,” Westfield Chairman Frank Lowy said in a media conference on May 16. “Our business is basically designed to go through these cycles.”