The large format retail property sector may be buoyant at present, but a combination of weaker consumer spending and a boom in new supply will put pressure on rental growth over the next few years, according to a new report by BIS Oxford Economics.
The research house expects the supply of new large format retail space to more than double to around 750,000 square metres in 2018, compared with 2017, at the same time as retailing conditions deteriorate.
A further headwind – not noted by BIS – is the potential for a loss of income and rising vacancies for large format centre landlords from Steinhoff Asia Pacific big box tenants, if the problems of its global parent spread into the region.
“Locational imbalances of supply and demand could see some centres suffer. And smaller centres, in particular, are at risk of falling income if one or two tenants fall over in the continuing challenging retailing conditions,” said Maria Lee, senior project manager at BIS and author of its latest Large Format Retail Property report.
In a “silver lining” for the sector, Ms Lee said some landlords would be insulated to a degree from the weakening conditions due to more liberal planning rules already in place in Victoria and other states which allow for non-bulky goods tenants like supermarkets, cafes, gyms and childcare in these centres.
Broader tenant base
Imminent changes to NSW planning rules will also broaden the allowable tenant base for major landlords like the Aventus Retail Property Fund, Harvey Norman and Primewest.
Looking beyond “the next few years”, when consumer spending improves, Ms Lee said large format landlords, especially those that have been able to diversify their tenancy mix, will still generate stronger returns than owners of other classes of shopping centres.
On Monday, the country’s second biggest owner of homemaker centres, the Aventus Retail Property Fund, delivered strong interim results in line with guidance and reported like-for-like income growth of 3.1 per cent, better than some of its traditional shopping mall competitors.
However, Aventus CEO Darren Holland said sales growth from its diversified tenant base was “moderating” from recent highs with the $1.85 billion landlord looking to increase the presence of non-household goods tenants – which currently account for 37 per cent of its income base – in its 20 malls.
In her report, Ms Lee said the large format retail sector had suffered a slump in the pace of consumer spending growth over the last couple of years, from a peak of over nine per cent (in moving annual terms) to under 2 per cent.
“Weak consumer demand is set to continue to the end of the decade, against a backdrop of muted economic and household income growth. Meanwhile, supply is surging as former Masters stores are converted into large format retail centres [by Home Consortium] and as other projects that had been trying to secure precommitment for some time now go ahead,” Ms Lee said.
As a result, BIS forecasts rental growth to fall behind the pace of inflation over the next five years, at less than 2 per cent per annum.
But, she said, what will prevent it being worse is the ability of centres to bring in a broader range of non-traditional tenants.
“This is a critical factor supporting the large format retail property sector,” she said.
“We’re seeing more gyms, play centres, medical centres, chemists, baby goods shops, pet supplies outlets and other uses.
“This broadening of tenant mix not only improves visitation across the week but also helps keep a lid on vacancies. Importantly, these tenants often pay a higher rent than the traditional large format tenants.”
In his address to investors on Tuesday, Mr Holland said the launch of Amazon in Australia and the rollout of former Masters stores by Home Consortium had had no impact on its business, which lifted occupancies to 98.6 per cent alongside positive leasing spreads and low incentives.
With average rents at $290 a square metre, occupancy costs are also a lot lower for large format tenants in Aventus malls.