Music teacher Victoria Jacono-Gilmovich and her husband will put their experience as tenants to good use when they buy premises for their music school. Struck by the reluctance of landlords to be flexible despite hard times in retail property, they intend to bring in extra income by leasing space to other small businesses.
Looking for premises to rent last year on the main retail strip of Sydney’s inner-west suburb of Five Dock, they thought getting a lease would be easy given the large number of vacant shopfronts.
They were wrong. Despite the tough retail climate, many landlords still wanted high rents and were inflexible with lease terms.
“One landlord wanted 8 per cent rent increases from year one,” says John Gilmovich, who is also a real estate agent and president of the Property Owners’ Association of NSW.
After an eight-month search, they found a Five Dock property owned by a real estate agent who understood the soft retail market. The rent was negotiated to about half that being asked by other landlords.
Those properties are still vacant, they say. The couple recently rented another shop in Balmain, with a 12-month option to buy.
On top of weak income growth and increased competition from online sales, retail property in Australia is taking a hit from persistently high rents as landlords seek better returns against rising property prices, as seen in the Gilmovichs’ experience.
It’s a vicious cycle because the consequence is an increasing number of business closures, both big and small.
Neighbourhood retail vacancy in NSW and the ACT has risen to 4.2 per cent from 3.7 per cent in the last financial year, according to the Property Council of Australia. Neighbourhood vacancy has risen across all states except for Victoria.
Agents say the key to a steady rental cashflow and making a return is flexibility.
“It is important to be open-minded about the type of tenants and to be very creative with the use of retail space in order to push the yield,” says Gilmovich.
Retail rental yields have been in the double digits but in the past few years, the going rate is about 5 per cent based on sales, according to commercial agents such as Dean Venturato of Burgess Rawson. Gilmovich agrees, saying those who can get 6 to 7 per cent are lucky.
It’s worth landlords considering “re-purposing” their retail properties for various uses such as co-working hubs or hot-desking spaces. Or sub-dividing their properties into smaller spaces for retail or other businesses that want to save on rent.
Once a space is sub-divided, landlords must also be prepared to take on shorter leases from businesses like pop-up shops and stands.
Gilmovich says he has seen retail landlords in his network moving away from traditional boutiques and the like to medical centres, pharmacies, gyms and childcare centres. Some shops have even become mini logistics/distribution hubs for their competitors – online retailers.
These changes are part of a rising trend, says JLL’s director of retail research Andrew Quillfeldt.
“We are certainly seeing owners diversifying the types of uses that exist within Australian shopping centres – they are driving overall foot traffic by adding health and lifestyle uses such as gyms, medical centres, childcare and play centres among others,” he adds.
Co-working hubs in particular are gaining a lot of traction. Quillfeldt’s research shows there are more than 75 co-working locations in US shopping centres, compared to none a few years ago, as well as in China and Singapore.
“Co-working in retail has the potential to become a more significant trend in Australia, but it’s more likely to be incorporated into centres which are close to densely-populated residential areas.”
Pop-up store leasing websites such as Popupshopup can help mum-and-dad investors considering shorter leases.
Popupshopup advertises thousands of short-term, one- to six-month leases on retail and commercial spaces offered by landlords. So popular is the site that it was recently acquired by Perth e-commerce and IT group CVW Creative. The site also offers insurance and facilitates inquiries between tenants and landlords.
It was the inflexibility among landlords encountered by the Gilmovichs that prompted them to think outside the square with their potential purchase in Balmain. They already lease the space to other teachers and non-music business owners.
“I looked towards like-minded businesses to lease my space when I knew it would not be in use during the day as most of my clients come after school and the space isn’t used much during the mornings [either],” Jacono-Gilmovich says.
“The businesses that I share my spaces with are also run by mum-entrepreneurs who would not have been able to take a full lease on their own, nor were they willing to take the risk as their businesses only operate for a select amount of hours in the day.”
But the creative use of retail spaces may not meet the zoning requirements of the local council. Research and patience dealing with council are essential, she adds.
Fit-outs for purposes other than retail can also be more costly.
While investors may think there are retail property bargains with many landlords desperate to offload due to high turnover or vacancy, this is not the case yet.
“Retail assets have not lost all their shine,” Venturato says.
“There are definitely winds of change in retail but there is an understanding by landlords [who still want to hold on to their assets] and new retail property buyers to be more discerning about the type of tenants – they’re favouring strong national brands with a high degree of insulation to online retailing.”