David Jones’ store rationalisation program is likely to hit landlords’ bottom lines as the department store chain hands back space and negotiates lower rents, according to analysts.
The department store’s owner, the South African-based Woolworths group, revealed in its results last Friday it was going to “aggressively close stores” across its 47 Australian stores portfolio.
This will see space being given back including in Melbourne’s CBD and in the Rundle Mall, Adelaide stores. The retailer has also closed down its food court area in the Wollongong store.
One retail agent, who declined to be named, said the sublet clauses in department store rent contracts allow the tenants to negotiate better lease deals.
Scentre Group, which owns and manages the Westfield shopping centres, has the largest exposure to David Jones with 17 stores, and two are in regional locations.
Scentre’s David Jones average lease expiry is nine years. Stockland, GPT and Vicinity all have one store in a regional location, albeit these stores opened within the last two years.
Overall the real estate investment trusts account for about 57 per cent of David Jones stores in Australia.
The department store chain still owns its flagship store in Elizabeth Street, Sydney and is undertaking a $200 million upgrade. It recently revealed its new-look second floor and unveiled a shoe emporium last year on Level 7.
David Jones sold its menswear store at 77 Market Street to Scentre and Cbus Property, and will move the famous food court in the basement, over the road to the Elizabeth Street store.
Macquarie Equities’ analysts, Stuart McLean and Darren Leung, said with similar programmes from Myer and Big W, the backfill of the extra space remains difficult.
“We remain cautious on the outlook for retail landlords” the analysts said.
“Lower-quality centres, with lower sales productivity and therefore more limited profitability, are more likely to have limited backfill options, in our view.
“Face rents [the quoted rental rate] could be higher given the difference in rent per square metre, being about $200 per sqm for a department stores and more than $1,500 per sqm for a specialty store, however downtime, lost space for common areas and capital expenditure for repurposing space are negative implications for landlords.”
While lease-break payments and likely “must trade” clauses will soften the negative impacts of closures, the analysts view this announcement by David Jones as another marginal negative piece of news.
“More favourable rental terms for retailers are also headwinds,” the analysts said.
It comes as shopping centre landlords are facing the impact of weak consumer demand with most people opting to keep their tax cuts instead of spending.
To entice customers, mall owners are now expanding their food courts and leasing more space to so-called internet-proof tenants, such as nail and beauty salons and interactive “experience” retailers that offer more than just clothes.
Many landlords are now ramping up involvement in the Black Friday and Cyber Monday shopping events, in November.
While it is an American tradition post Thanksgiving, the amount of international brands now in Australia, means they follow the same sales events around the world. It has been a mixed exercise for landlords, which all report a boost in turnover, although it has made people spend less at Christmas.
The ANZ Bank’s retail insight team said retail spending growth is now the slowest it has been in year on year terms since 1991, reflecting squeezed household budgets.
“The pressure on retailers from slowing spending growth and increased competition from online sellers is reflected in retail prices, which are going backwards for non-food products on average,” the bank said.
“With margins under pressure, retailers are looking to control costs. One result; retail property rents are not growing as fast as they did in the past.”
The bank expects a lift in household spending through the second half of this year, as lower interest rates, tax cuts and the removal of uncertainty about the election result all boost spending.
But it said after this ‘pop’, retail growth will likely normalise to the moderate growth rates seen in the last five years, rather than the very slow rate over the last year.
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