Major challenges remain for retail property
GUEST OBSERVATION
The Lazarus of the Australian economy – consumer spending – seems to be starting to recover from the dead zone created by budget related shocks. But how long can it last? The long-term prognosis remains troubling.
A growth recession?
As I am sure all readers will recall from their school days, an oxymoron is a combination of contradictory words. Cruel kindness, for example. The term comes from the Greek for ‘pointedly foolish’, but those in Australian retail property may be feeling that the somewhat oxymoronic-sounding ‘growth recession’ is more serious than that.
Virtually none of the federal government’s cuts and increased costs are likely to pass through the Senate. This is good news for the retail sector; if some of these measures were to make it through annual household income would drop by over $600, causing big spenders on low to medium incomes to think twice about splashing out on the next big purchase.
While a small bounce back in consumer confidence has seen a slight pick-up in retail sales over the last few weeks, this may not be enough to save spenders from having to tighten their belts and save the retail property sector from pain. For over five quarters Australia has registered annual growth at less than 1%, which is disturbingly news considering Australia’s population growth stands at 1.8%.
It’s almost like a recession on an economic growth per capita basis and that is why things are, and are likely to remain, tough for retail.
GDP per capita is moderating…
GDP per capita: % change quarter on quarter chain volume measures. Source: BT Investment Management.
…affecting retail sales in 2014
Retail turnover (SA). Source: BT Investment Management.
There’s a strong warning signal for retail sales
Over the past three years interest rate cuts have prompted some improvement in retail sales. Even with rates kept at historic lows this streak won’t continue. Australians just aren’t interested in borrowing – they’re keeping 24 months ahead of their mortgage repayments and getting better at saving. Consumers have already stopped spending on big ticket items like overseas holidays and cars – new car sales are falling 3% year on year.
Looking to the future, there’s one warning signal investors must not miss – household income growth has dropped from 11% in 2007 to just 3.5% in 2013. This typically correlates with a 2% drag on retail sales, which, closely followed by falling rents, weakens retail property yields.
What it will take for conditions improve?
There’s still a world of opportunity in retail property if you know where to look. Very high population growth in Australia (the highest in the developed world) ensures continued demand for quality shopping centres, but there are some major challenges ahead – rising online sales, the growth recession and lacklustre pay rises will be compounded when interest rates rise once again.
For a sustained increase in retail spending and a retail property boom, we need to see improving income growth, solid house price growth and growing confidence in the economy and the federal government.
Julia Forrest is REIT portfolio manager at BT Investment Management.
