Retail property under pressure for another 10 years

The lacklustre retail environment will have a huge impact on the property sector, with a new BIS Shrapnel report predicting retail real estate is set to suffer under poor conditions for as long as another decade.

While high savings rates and low consumer confidence are part of the problem, BIS Shrapnel senior project manager Maria Lee tells SmartCompany the Australian dollar is a much bigger issue.

With the currency continuing to fall, shopping centre incomes are set to decline. Even though a lower currency may boost local spending in stores, rather than online, retailer profit margins will be tight.

“The Australian dollar is going to put pressure on margins and retailers’ ability to pay rent increases will be under pressure,” she says.

“Not everyone is going to be badly affected…but the fall in the dollar is a big factor in the outlook for the next few years.”

“It looks as though some businesses haven’t really been taking that into account.”

Such predictions are bad news for a retail sector which is already under pressure – the latest Australian Bureau of Statistics data shows spending rose by just 0.2% in April.

The BIS Shrapnel Retail Property Market Property Forecasts and Strategies 2013 to 2023 report makes some similarly sobering predictions.

The first major impact is that more dollars are going online, instead of through local stores. The report predicts over the next five years the market share of online retailing could increase from its current rate of 6% to 11%.

The second pressure is the Australian dollar, which will negatively impact retailer profit margins.

Lee says a retailer which imports 50% of product sold will see its profitability fall to zero if it pays current rents. “Clearly, this is not sustainable,” she says.

As a result, vacancies can be expected to rise in the next decade. BIS Shrapnel predicts shopping centre incomes to grow at between 2-5% per year over the next five years.

“Retailers and shopping centre owners are going to have to work harder than ever to remain relevant and sustain growth,” BIS argues.

Lee says the consequences go further – the pressure on the retail property market means the industry may not return to pre-global financial crisis yields before the next boom, which isn’t likely to occur in the next 10 years.

With the declining Australian dollar, international investors may also back away.

“The amount of activity taking place is diluted,” says Lee, attributing this trend to the high level of retail property construction underway over the next few years.

“These commencements right now will lead to completions in the next two or three years after that, so in the meantime that spend is diluted.”

While such low returns are disappointing, Lee says not everyone is going to be so badly affected.

“If you’re a retailer not importing very many goods, this isn’t going to impact you nearly as much,” she says.