Retail property transactions hit a record high in 2012, but growing online retail sales and a weaker Australian dollar will put pressure on the retail sector, according to research by BIS Shrapnel.
BIS Shrapnel said strong investor interest will continue throughout the rest of this year and retail property owners will continue to invest in their centres, according to the Retail Property Market Property Forecasts and Strategies 2013 to 2023 Report.
“In our view, retail property faces its greatest challenges in decades—barring the immediate post-GFC period,” Maria Lee, senior project manager at BIS Shrapnel, said in a statement.
“There are a number of factors at play. Firstly, aggregate retail turnover growth is likely to be modest over the next decade, as we are lacking two key drivers to growth – an economic boom and/or (marked) falls in the savings ratio.”
But two emerging trends could impact on the retail industry, according to BIS Shrapnel, including the growing online retail market.
The NAB Online Retail Sales Index recently found $13.7 billion was spent on online retail transactions for the 12 months to May 2013. This was equivalent to 6.1 per cent of bricks and mortar spending in the year to April 2013.
The BIS Shrapnel report predicts online spending could increase from 6% to 11 % in the next five years.
“What this means is that more than $3 out of every $10 of additional expenditure will go online,” Ms Lee said.
“Put another way, the turnover growth through shopping centres would be a full one percentage point higher without the growth of online shopping. That’s highly significant.”
BIS Shrapnel said the growth of online retail could also impact on the profit margins of retailers due to consumers using websites to compare prices and demanding in-store price matching.
The forecaster said the other emerging trend to have an impact on bricks and mortar retail is a drop in the Australian dollar, with flow-on effects for retailers’ profitability and their ability to pay rent.
It has also predicted overseas investors will be less aggressive with a lower dollar.
“Based on our forecasts of a 23% depreciation against the Trade Weighted Index, we estimate that a retailer which imports 50 per cent of product sold will see its profitability fall to zero if it is to continue to pay current rents,” Ms Lee said.
“Clearly, this is not sustainable. This will impact [on] their ability to pay rent and vacancies could also be expected to rise.”
BIS Shrapnel also predicted centre incomes will fail to keep pace with inflation and grow at an average pace of 2% per annum, which will require retail owners to “work harder than ever” to sustain growth and remain relevant in the market.
“The weak prospects for income growth have clear implications for total returns to retail property. Pre-GFC, even if income growth was weak, total returns were nonetheless solid thanks to the long term firming of yields. But that process has run its course and we don’t expect to get back to 2007 yields before the next boom – which is unlikely to be in this decade,” Ms Lee said.
Ms Lee also said spending patterns are also changing, due to Australia’s ageing population.
“On top of that, retail turnover to individual shopping centres will be diluted by strong levels of retail building – a new peak in commencements is expected in 2013-14,” she said.
Retail development includes two upgrades by Westfield, including a $435 million redevelopment of Westfield Miranda, NSW and a $400 million redevelopment of Westfield Garden City, Queensland.
Despite the bleak outlook for the retail industry, BIS Shrapnel said retail property will still offer solid returns and strong centres will continue to operate with good cashflow, with not a lot of variation in income returns.