Shopping centre landlords forced to discount leases to attract new tenants

Australia’s biggest shopping landlords are being forced to offer discounted rental rates to new tenants as speciality store sales growth stalls and retailing remains subdued.

The leasing spread on new leases signed by GPT Group, which operates 17 shopping centres, has gone backwards by 10%, while Australia’s biggest shopping centre owner, Westfield, has given up 6% on new leases.

The leasing spread for the restructured Centro group, which has $6.6 billion worth of shopping centres under management, slipped by 2.2%, with Charter Hall Retail the only listed retail trust (REIT) to achieve growth on new leases. Charter Hall's spread rose 3.7%, the Australian Financial Review reported.

Leasing spread is a key metric in retailing representing the percentage increase over rental rates on existing leases versus rental rates on new and renewal leases.

It gives an indication of the strength of the retailing sector and the overall economy.

According to investment site Wealthmanagement.com, during periods of economic weakness, leasing spreads narrow and "some even go into negative territory".

“As the economy strengthens, and retailers are able to pay more rent, leasing spreads increase.”

Presenting Westfield's interim results update last month, co-chief executive Steven Lowy said lease incentives had increased in the subdued retailing environment, but added that Westfield was cautious about how it used rental incentives.

The drop in new lease spreads comes as retail sales figures recorded their biggest fall in almost two years, declining by 0.8% in July according to ABS data.

Research compiled by Merrill Lynch show that speciality retailers managed average comparable sales growth of just 0.6% over the past financial year to the end of June.

Despite the drop in leasing spreads,  the investment outlook for shopping centres anchored by supermarkets and food operators remains healthy, according to Colliers International,

“The stability of supermarket based retail and the food category in general has led to stronger interest in supermarket-anchored centres,” said Colliers International in its 2011-2012 National Retail Investment Review.

“The appeal of neighbourhood centres from an investment perspective lies in their ability to provide steady rental income through long term leases, underpinned by the large supermarket tenants, predominately Coles and Woolworths," says Colliers.

“The lower average occupancy cost for specialty tenants in food-based centres has also been an attraction for investors. This sector continues to dominate sales activity in volume terms, accounting for 42% of all deals.

“The price point remains the key driver of investment returns, with the average value of trades steady at around $20 million. There is generally strong interest in centres sub-$30 million.

“Investors in neighbourhood centres appear prepared to purchase lower value assets on sharper yields, as these are typically easier to debt fund, and less management intensive.”

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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