Better year expected for retail property sector despite 'insipid' November ABS sales result

Better year expected for retail property sector despite 'insipid' November ABS sales result
Better year expected for retail property sector despite 'insipid' November ABS sales result

Retail sales rose only 0.1% in November, below expectations, but economists and retail property analysts are reasonably confident of a good year for retailers and retail property landlords in 2013.

Shopping centre owners and retail landlords with a high proportion of service-orientated tenants, such as cafes, restaurants and travel, and entertainment operators should be well placed, and there is also expected to be a continued expansion of overseas retailers into Australia.

In addition, the ABS figures suggest the larger chain stores and supermarkets are continuing to perform well, (though department stores are still struggling).

Michael Bate, Colliers International head of retail, is optimistic about 2013, after the sector underwent what he calls “significant structural change” in 2012 following two decades of outperforming the commercial property sector as a whole.

“While retailers will continue to review their store portfolios with a view to improving performance, most domestic retailers have now completed their network rationalisations and we anticipate some will look at expansion at 2013,” he says.

He says the retail sector will be influenced by the impact of interest rate cuts on household disposable income, the level and intensity of price discounting by retailers and the management of operating costs by both property owners and retailers.

While figures from the all-important Christmas retail period are not yet available, Bate says Colliers expects a modest improvement in retail spending in 2013, with “household incomes to be supported by rate cuts, cushioning the impact of slower wages growth and higher taxes”.

“Retail spending remains below long-term averages in Australia, but the volatility experienced over the past six months has now moderated,” he says.

Nora Farren, Colliers International research director and author of the latest Colliers International retail research and forecast report, says that from an investment perspective, retail assets remain appealing.

“High quality, dominant shopping centres are still performing well despite the slowdown in retail turnover growth.

“They continue to be viewed as a defensive investment class. Retail has also been the beneficiary of capital inflows from overseas investors. The high relative yield spread (due to low bond yields) combined with the global appetite for low-risk investments are supporting this demand. Foreign investors have been active in the retail property sector, with several major sales involving offshore institutional investors,” she says.

She says “experience with convenience” will keep consumers coming back to shopping centres.

“Consumers are spending more on experiences such as travel and at cafes and restaurants. As a result, we are seeing increased focus on entertainment, lifestyle and food precincts in shopping centres, as perceptions change as to what attracts consumers to a centre, and keeps them there for longer,” says Farren.

She also expects the influx of overseas retailers to Australia continue “apace next year”.

“This charge is being led by US brands, but retailers from Europe and increasingly Asia are looking to expand into Australia.

“While the entrance of offshore retailers has some domestic retailers shaking in their boots, the arrival and positive view of our market potential should be a comfort to our industry. Positives can be taken from the renewed interest in retail that these new brands generate.”

 


 

However, it is likely to be a continued struggle for many smaller retailers, especially those selling discretionary items that can be bought more cheaply online.

Landlords with retail investment in the mining states appear well-placed, with WA annual retail growth to November standing at 8.6% and Queensland at 4.8% per annum, compared with NSW managing just 2.2% annual retail sales growth and Victoria. 1.2%.

At face value, the November ABS figures were a disappointment, with the market tipping a 0.3% rise in November and earlier rate cuts in May and June totalling 75 basis points appearing to have little impact on consumer spending.

With October's flat outcome left unrevised, the annual pace of retail sales growth moderated further to 2.9%.

Westpac economist Elliot Clarke points out that in trend terms, retail sales are now growing at “an insipid 0.05% per month – a 0.6% annualised rate”.

He also points out that all the growth in retail sales in November was solely due to a 1.2% increase in “takeaway activity” with cafe and restaurant activity falling 0.4%.

“Arguably, this is further evidence of consumers economising, favouring eating at home over eating out. Basic food retailing was flat, possibly due to falling fruit and vegetable prices,” says Clarke.

Department store sales fell for a third successive month by 0.4%, clothing & footwear experienced its fifth consecutive decline (–0.6%)  and household goods retailing declined by a further 0.9%.

Clarke concludes that retail sales growth will again be weak in December and in 2013.

However,  CommSec economist Craig James notes that sales by “larger retailers” rose by 0.5% over November and “soared to record highs”, with larger retailers now accounting for a record 64.8% of all retail trade.

The large retailers segment refers to 500 of the biggest retailers in surveyed by the ABS each month, whose results are not weighted due to their size, unlike the 2,750 'smaller' retail businesses that are weighted.

The ABS does not provide details of which businesses are included in this category, but says the results indicate that some of the larger business chains such as supermarkets are doing well, while others (notably department stores) are struggling.

 


 

According to James, this could indicate that larger retailers are continuing to take business from small business, but may also indicate the growing tendency to purchase goods online as the major online businesses are in the large retailer sector.

While the mystery remains as to what impact online sales is having on retailing figures, James says there is “good reason to suspect that retail spending is stronger than the top-level data suggests. In fact, much closer to ‘normal”.

“I think 2013 will be a better year for retailers,” James tells Property Observer.

While there will be further pressure on retailer margins, he says he is “reasonably positively” about 2013 provided there are no major overseas disasters.

Factors in favour of a better year for retailing include low unemployment, improved housing affordability and lower interest rates meaning consumers can be a little more confident, says James.

"Consumers will still continue to look for bargains and compare store prices with what is available online."

He says service-orientated retailers (cafes, restaurants, travel and entertainment providers) should continue to do well.

ANZ economists Riki Polygenis and Justin Fabo also note the better performance of larger retailers  "trending higher in contrast to the broadly flat profile for small retailers’ sales over the past 18 months"

They say that recent weakness in retail sales appears "heavily concentrated among smaller retailers, with sales well down from their peak in June".

"These retailers tend to have less flexibility to maintain sales via discounting, marketing and other strategies and a higher share of their sales are likely to be discretionary,says Polygenis and Fabo.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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