Mall Brawl Looms in Australia as Stores Cry Poor on Rents
Australia’s biggest shopping-center operators, Westfield Group, Stockland and GPT Group (GPT), are lowering rents for new stores while existing tenants call for cuts as major-mall sales drop for the first time in a decade.
Myer Holdings Ltd. (MYR), the nation’s largest department store chain, will close as many as a quarter of its outlets as leases expire if rental costs, estimated at 52 percent higher than those paid on average by New York-based Saks Inc., aren’t cut. Premier Investments Ltd. (PMV), the largest operator of small stores, is closing 50 shops and seeking lower rents at remaining sites that pay triple The Gap Inc.’s estimated average global rent.
“The pressure is going to mount on landlords,” said Tony Sherlock, head of property research at Morningstar Inc. “Landlords are able to replace exiting tenants, but the new tenants may not be willing to pay the same rent.”
A lack of new supply and an economy that has skirted the global recession has ensured Sydney and Melbourne are in the top 10 most expensive places in the world to rent shops. Sydney is the third-most expensive city for prime retail rents after New York and Hong Kong, and Melbourne is the eighth priciest, according to a November report from CBRE Group Inc. Rents at major malls in Sydney haven’t declined since the Los Angeles-based property broker started records on the city in 1981, while Australia-wide rents haven’t dropped since 1997.
The priciest retail rents in Sydney, Australia’s largest city with about 4.5 million people, cost A$13,560 ($13,355) a square meter (10.76 square foot) in the three months ended Sept. 30, CBRE said, versus $15,244 in New York. Rents for Sydney’s medium-sized malls fell in the three months to March for the first time since 1999, CBRE said.
Bird in Hand
Australian retail sales unexpectedly fell in April for the first time in 10 months, with a 0.2 percent drop from March. Spending at department stores led the decline, dropping 1 percent, the Bureau of Statistics said today.
Stockland (SGP), Australia’s biggest diversified property trust, cut rental costs by an average 21 percent in the six months to the end of December for the 10 stores that replaced tenants who went into administration, according to a company presentation. An additional 81 expiring leases resulted in rent cuts of 2.8 percent for their replacements, while the 102 stores renewing their leases paid 6.1 percent more.
“It’s economically favorable to retain a retailer than to replace them,” said John Schroder, Stockland’s head of commercial property in Sydney.
Australia’s A$240 billion retail industry is pinching pennies as households increase saving to double the U.S. rate and the Australian dollar’s 23 percent surge in the past three years drives purchasers online. Consumer sentiment has been negative for eight out of the last 11 months, according to a survey by Westpac Banking Corp. and the Melbourne Institute.
The consumer discretionary subset of Australia’s S&P/ASX 200 Index has slumped 59 percent since its peak in May 2007. The benchmark’s property gauge -- of which Westfield, Stockland and GPT are the biggest members -- has dropped 67 percent from its high in February 2007.
Westfield shares suffered their sharpest fall in two weeks, sinking 2 percent to A$9.11 at the close in Sydney. Stockland was unchanged, while GPT added 0.6 percent.
Online spending by Australians rose 15.5 percent in the year to April compared with a 4.1 percent increase at stores, according to a May 28 report by National Australia Bank Ltd.
Still, near-full malls helped shopping-center operators boost total rental income last year even as they gave new tenants cheaper leases and offered moves to smaller shops.
GPT’s leasing spreads -- a measure of the rental rates on newly signed tenants compared with those of existing stores -- fell 6 percent from a year earlier in the three months to March 31, it said May 2. The occupancy rate was 99.4 percent.
Rents rose across 88 percent of GPT’s malls, with an average increase of 4.5 percent in the year ended Dec. 31, the Sydney-based company said in its annual review March 7.
“Shopping centers continue to evolve with the wants and needs of customers,” Brett Williams, retail portfolio manager at GPT, said in an e-mailed response to questions from Bloomberg. “A great example of this is the strength of the entertainment and restaurant precincts within shopping centers today.”
Leasing spreads at Westfield were down 1.5 percent in the first quarter, co-chief executive officer Steven Lowy said at a media briefing in Sydney on May 16, the first decline in at least five years.
Westfield, whose biggest tenants are Myer and department store David Jones Ltd. (DJS), said more than 99.5 percent of its space in Australia and New Zealand was leased at March 31, with a specialty-store rental increase of 3.1 percent in the year to March. Department store sales in Australia fell 5.2 percent from a year earlier.
“The better centers are always better centers and the struggling centers are struggling,” Westfield Chairman Frank Lowy said in a media conference May 16. “Our business is basically designed to go through these cycles.”
Landlords can’t allow spaces to stand empty for fear the downbeat appearance will dent revenue at neighboring stores, starting a chain reaction, said Michael Lonie, New South Wales state director of the National Retail Association.
Dog With Fleas
“If you’ve got too many dark spots you’re in trouble,” he said by phone from Sydney. “It’s like a dog that’s got fleas: if you don’t treat it, it will turn into mange, and once it’s got mange it’s hard to recover.”
Annual sales at the country’s major shopping centers fell for the first time since at least 2000 last year, to A$39.9 billion from A$40.7 billion, according to data compiled by the NRA. Sales dropped at 38 of 84 malls surveyed.
“If the store is marginal, we will walk away unless we can get 30 percent to 50 percent rent reduction,” Myer’s Chief Executive Officer Bernie Brookes said in a phone interview in April. “The power base has moved from the landlords.”
Myer will end this year with a smaller network for the first time in at least seven years, and will close any outlets in the bottom 25 percent of performance if leases come up for renewal and landlords don’t meet rent demands, Brookes said. About three to four such renewals come up each year, he said.
Myer stock fell the most in more than 15 months on May 23 after cutting its profit forecast to a decline of as much as 15 percent in the year ending July.
The company paid $227 per square meter for retail space, while second-ranked department store David Jones paid $206 a square meter, according to estimates in a report by Morgan Stanley last June. That compared with $149 paid on average at Saks malls. Melbourne-based Premier Investments, with smaller stores and shorter leases, paid $1,202 against $424 at San Francisco-based The Gap.
Myer’s rent accounted for about 19 percent of operating expenses in the year through July 2011, compared with 7.2 percent paid by Hoffman Estates, Illinois-based Sears Holdings Corp. and 2.9 percent by Cincinnati-based Macy’s Inc., according to data compiled by Bloomberg. David Jones’s rent accounted for about 17 percent of costs. The company differs from Myer in owning its two largest stores, in Sydney and Melbourne, which together account for about a quarter of sales.
Any shift in bargaining power away from mall operators and toward store owners may take years, said Winston Sammut, managing director of Sydney-based Maxim Asset Management. Retailers that break leases early pay punitive fees equivalent to three to six months of rent, and property companies have been able to successfully replace most exiting tenants.
“By putting it out there that retailers are reducing or closing stores, that puts pressure on landlords,” he said. “The change has started, but I’m not sure it’s swung all the way round yet.”
Tenants’ hands are being strengthened by about 400 store closures that have been announced since the start of 2011 as a result of bankruptcy and recovery efforts at major chains, said James Stewart, Melbourne-based retail partner at restructuring company Ferrier Hodgson.
“There’s hundreds of stores and leases being closed down and that means hundreds of other places we can get for rent,” Premier Investments’ chairman Solomon Lew said in an interview in Melbourne in March. “The landlord community by and large is not facing up to that.”
The NRA’s Lonie said mall owners may be facing a structural downturn in the same way that gas stations which were “on every corner” in the 1960s and 1970s saw returns dwindle.
“We are oversupplied in terms of retail in Australia,” he said. “This is the first time the landlords are going to be confronted with it.”