Shopping centres feel the pinch as retail speeds up move to online

 In Home News Section, Uncategorized

If you are not shopping online yet, you probably soon will be.

COVID-19 has turbocharged the growth of online retail and brought the ongoing rent battle between landlord and retailer into the spotlight.

And the winner could be you.

Retail has been reimaging itself for years, with “for lease” signs becoming an all too common sight on neighbourhood high streets, while the mix of shops became less fashion and furniture, and more eateries and medical facilities.

COVID-19 is forcing another metamorphosis of retail, with once-thriving CBD shopping districts now ghost towns.

“This is the quietest I’ve ever seen Pitt Street in all the years I’ve lived here in Sydney,” observed Colliers Australia head of retail Michael Bate.

Despite quiet central shopping districts, Bureau of Statistics data shows retail sales in July were 12 per cent higher than July last year.

Online shopping surge

Australia’s transition to online retail, which had been advancing slowly, has been turbocharged by the pandemic.

Last year, Australia Post predicted online shopping would account for 16 to 18 per cent of all retail spending by 2025.

But, with 5.2 million people shopping online in April, Australia Post has pulled that target forward.

It now expects 15 per cent of all retail spending to be in the online marketplace by the end of this calendar year.

“We’ve effectively seen five years of e-commerce growth in six months,” KordaMentha Real Estate and Investments Partner Berrick Wilson said.

NAB merchant data shows a 62.6 per cent increase in online retail sales in the 12 months to July.

That figure towers over preliminary Bureau of Statistics data which shows a 12.2 per cent increase in traditional retail in the same timeframe.

Foot traffic becomes web traffic

Footwear retailer Florsheim is adapting to the surge in online demand.

“We’ve seen significant growth — we used to see about one-in-eight orders last year online, we’re now seeing one-in-four and some weeks one-in-three,” Florsheim Australia president Damian Walton told The Business.

“The customer has migrated to digital very fast.”

Florsheim has 31 physical stores in Australia and is currently determining what to do with eight shopfronts that are up for rent renewal in the next few months.

“Making commitments in stores in particular is a big consideration for us,” Mr Walton said.

“Stores are still relevant and important, but it has to be sustainable.

“Both landlords and retailers need flexibility.”

The 110-year-old shoe company will be injecting more resources into its digital trade and less in bricks and mortar.

“We’re going to continue to invest in online immeasurably because it’s where the customers are at,” Mr Walton added.

It is a trend being adopted by many retailers, who will be relying on their physical stores less and less — even when the pandemic is over.

“There is going to be a considerable adjustment of what retail looks like going forward,” Colliers International’s Mr Bate said.

Does this mean physical stores will disappear?

In a word, no.

Consumers may be embracing online shopping like never before, but market analysts say they will still want a place to browse in and buy from.

“It’s not bricks and mortar versus online — it’s just shopping whenever, wherever, however people want,” KordaMentha’s Mr Wilson commented.

He said retailers also serviced online orders from their physical stores.

Mr Bate agreed, adding local shopping districts were buzzing again.

“The neighbourhood shopping centres, the sub-regional shopping centres in local communities are trading their heads off because everybody’s shopping locally,” Mr Bate told The Business.

Mosaic Brands, which include labels Noni B, Katies and Rivers is another retailer looking to reduce its physical footprint.

One of its landlords, Scentre Group, locked it out of 129 of its stores at Westfield shopping centres last month in a rent dispute that has since been resolved.

Nonetheless, Mosaic Brands is still planning to close between 300 and 500 of its 1,333 stores in the next two years.

Retail real estate values to fall

Plans by retailers to shut up shop, even when the pandemic is over, are not good for landlords who have been facing headwinds for years.

A KPMG report reveals yields — or rental returns — on retail real estate have fallen about 2 per cent since 2009.

KordaMentha’s analysis supports KPMG’s, noting that falling interest rates have pushed up prices relative to rental returns.

“Yields have been coming down since about 2014, which drives the value of property up and as a result, I think the owners have then been trying to increase the rents along the way,” Mr Wilson observed.

He added that retail REITS (real estate investment trusts) wrote down the value of their assets by an average of 9.2 per cent in the half year to June 2020 in the recent company reporting season, with the COVID-19 pandemic acting as a catalyst.

About a third reduced their value by more than 10 per cent and some write-downs were as high as 25 per cent.

“The market seems to think there is still more asset value reduction to come as many REITS with retail exposure are still valued well below net asset values,” he said.

Mr Wilson expects some retail spaces will be repurposed to higher return uses like office space, hotels and residential.

Pay as you go

Landlords have given many retailers a lifeline during the pandemic.

Last month, the Shopping Centre Council of Australia said landlords had provided $1.6 billion worth of rent assistance under the Retail Code of Conduct, with a focus on helping small and medium retailers.

Scentre Group announced this week it received $183 million rent in August, an increase on the major dips it posted in April and May.

But retailers and analysts say the crisis has exposed the existing model of long leases with regular rent increases as outdated and unrealistic.

“To revert back to the standard five-year term, 5 per cent increase every year fixed rent deal is just not sustainable,” argued Mr Walton.

“Retailers can’t plan their business, with that level of upfront commitment, without the certainty of where revenue will come from customers and their changing shopping habits.”

He would like to see a more flexible model, similar to that in the UK and US, where the amount of rent a retailer pays is based on their turnover or a percentage of that store’s income.

The Shopping Centre Council of Australia, which represents landlords including Scentre Group, Stockland and Vicinity, did not answer the ABC’s questions.

“Successful click-and-collect strategies that utilise physical stores have played a role in driving record online sales growth,” the council’s executive director Angus Nardi said in a written statement.

“As Christmas approaches and footfall continues to increase in shopping centres around the nation, we thank our retailers who have worked hard to keep their doors open through this difficult period.”

However, analysts do not see things going back to the way they were pre-COVID.

“I expect that we’ll probably see a hybrid,” Mr Wilson said.

“We’ve seen this before where there’s a more sustainable base rent plus a turnover rent on top of that, effectively binding the landlord and the tenant together in a more collaborative sort of way.

“I don’t think it’s impossible, I just think it’s going to require an evolution of the way we think about valuing property and a more collaborative approach between landlord and tenant.”

By business reporter Rachel Pupazzoni (Original ABC Article)

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