Relaxing zoning laws would help struggling retail sector: Productivity Commission

Relaxing zoning laws would help struggling retail sector: Productivity Commission
Relaxing zoning laws would help struggling retail sector: Productivity Commission

As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.

 

The final report by the Productivity Commission into the retailing sector has recommended easing planning and zoning requirements to increase the supply of retail space. 

The commission believes this is the best way to redress the imbalance of power held by shopping centre landlords over smaller retailers. 

The newly formed Retail Council of Australia has been tasked with implementing the commision’s recommendation that state, territory and local governments “broaden business zoning and significantly reduce prescriptive planning requirements to allow the location of all retail formats in existing business zones to ensure that competition is not needlessly restricted”. 

The council must also implement the objectives of the National Retail Tenancy Working Group set up following the 2008 review, including the harmonisation of retail tenancy leases across jurisdictions and developing a common terms framework to be used nationally in reference to retail tenancy leases and the simple meaning of these terms. 

Russell Zimmerman, executive director of the Australian Retailers Association, says the peak body will work alongside the Retail Council in implementing these recommendations:

“Retailers have faced poor trading conditions for the last eighteen months as well as soaring rents and costs. The ARA intends to work as part of the Retail Council of Australia to balance the power between retailers and their landlords through addressing planning and zoning restrictions as well as working to harmonise and nationalise leasing legislation as quickly as possible.”

In its 563-page report, the commission says planning and zoning constraints appeareto be “the root cause of many of the concerns in the retail tenancy market”.

“Simply put, occupancy rates are extremely high in shopping centres due to strong demand for retail space in the face of constrained supply. 

“This places smaller retailers — who do not have the bargaining power of anchor tenants or chain specialty stores — in a very tough bargaining situation. 

“While it is possible for these retailers to ‘vote with their feet’ and move to shopping strips or other locations, the alternative sites are not always commercially attractive.” 

According to the report, planning and zoning controls have had “some adverse impact on the efficient operation of the retail tenancy market by increasing retail centre development prices to a level higher than they would be otherwise [and] reducing the level of localised competition between shopping centre landlords”. 

The report acknowledges the “large gap between rents of anchor tenants and smaller specialty retailers in shopping centres” but also accepts explanations from the likes of Westfield and Mirvac of “the importance of anchor tenants to the success of a shopping centre development”. 

According to the commission there is scope to improving the retail tenancy market by “removing unnecessary restrictions on competition and constraints on the supply and location of retail space through reforms to the planning and zoning regulations”. 

Implementing these reforms, it says, “would potentially increase competition between shopping centre landlords, and reduce the bargaining power of landlords vis-à-vis their tenants, by improving tenants’ ability to relocate close by and preserve their businesses after lease expiry”. 

The 563 page report highlights the growing dominance of shopping centres in the make-up of the retail market. 

“Current planning arrangements have produced 45 million square metres of retail space in Australia which over time is increasingly distributed towards shopping centres. 

“While most retailing still occurs outside of shopping centres, centres represent a growing share of the total market. The contribution of shopping centres to total retail space increased from 28% in the early 1990s to 38% in 2005-06.”

The commission highlighted the following as the key tenancy concerns raised by retailers

  • Large gap between rents of anchor tenants and smaller specialty retailers in shopping centres.
  • Significant differences in retail rents in Australia compared to the United States.
  • Reporting of turnover data in shopping centres is used to set rents at ‘excessive’ levels.
  • Shop fit-out requirements, particularly the inability of retailers to negotiate competitive quotes for the work undertaken.
  • Standard lease terms (a provision incorporated in most state and territory legislation in a bid to improve security of tenure for tenants), that are normally of five years duration, do not provide sufficient security and are insufficient to amortise capital costs.
  • Limited negotiating power of retail tenants in shopping centres at the time of renegotiating a lease.
  • Landlords exploiting their superior bargaining power when a lease expires by seeking ‘excessive’ rent increases.
  • Retailers’ lack of security of tenure during ‘lease hold over’ periods.
  • Lack of publicly available information relating to shopping centre rents.

Photograph by Sherwin Huang

 

    Larry Schlesinger

    Larry Schlesinger

    Larry Schlesinger was a property writer at Property Observer

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