Rent Increases- an Inconvenient TruthBY Phillip Chapman
The recent Retail Sales results have been (and rightly so) reported as “frightening,” to quote ARA Executive Director Russel Zimmerman. And I concur that this Christmas retail performance stands as one of the most important outcomes since the GFC.
Scentre, operator of Westfield S.C., released their 3rd Quarter Results on Melbourne Cup Day- surely this was only a coincidence?
Highlighted in the media reporting was naturally Department Stores well down (-6.7%) however off-set by Technology and Appliances category trading up (+6.5%). In between these polarising results were a couple of select categories that painted a generally rosier picture.
But when you scratch the surface i.e. google “Scentre third quarter 2017” the whole report does underline the growing concern surrounding the health of the retail sector.
You will notice Supermarkets are up only +0.9%, Discount Department Stores down -0.6% and General Retail up +0.3%.
With inflation running at 1.8% (ALL Groups) highlights the anchors to our shopping centers - the Supermarkets are trading at 50% of inflation.
Then how can the market continue to sustain fixed/and or inflated annual rental increases.
A case study by Peter Buckingham of Spectrum Analysis published a White Paper- Shopping Centers-An Inconvenient Truth which asks this very question?
“How do Shopping Centre owners press for increases in rents of 4% or 5% p.a. when the increase in $/sqm sold through the centers has been increasing in the range of 0.5% to 1.65% p.a. over the last few years?”
Peter’s White Paper references the Property Councils own Data and then delivers the results by size of Shopping Centre and even identifies actual Shopping Centre results.
Again, this is more evidence Retailers need to be accessing with far more scrutiny.
Even in a buoyant market, Retailers need to be achieving year on year sales growth at least double what the annual rent increase dictates to keep in front of not only occupancy costs but all the other operating costs such as wages (and let’s not talk about electricity).
We don’t have to call in the rocket scientists to understand that if rent per square meter is going up 4% to 5%, and sales per square meter are going up 0.5% to 1.65% where your profits are heading.
So what do we do?
Firstly, each Retailer needs to do their research, access the information referenced here to start- it’s all free and readily available.
Be realistic about sales projections not just for the next period but over the term of the lease (or balance thereof) and ask the question “how is the real estate (under lease) performing for you?” Or as I suspect, are you working for the real estate?Need leasing advice or management services? The ARA has partnered with Lease1 to save retail tenants time, money and stress in their lease negotiations. To learn more about ARA Leasing Services contact http://lease1.pages.ontraport.net/enquiry or email firstname.lastname@example.org.
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