Business News – Spending Squeeze: Retailers, landlords evolve to meet changing market.

Landlords unwilling to budge on rents have been blamed for exacerbating Perth’s retail downturn, but leading leasing agents say the sector’s problems are substantially more complicated than the cost of tenancies.

A walk through Perth’s Piccadilly Arcade offers a glimpse of the challenges currently facing Western Australia’s retail sector.  What was once a thriving shopping arcade has been reduced to a thoroughfare connecting the Hay Street and Murray Street malls, with a mass exodus of tenants to allow for redevelopment works contributing to a growing perception that Perth’s CBD is no longer a vibrant or interesting shopping destination.

However, the reality is that Piccadilly Arcade’s offshore ownership group has responded to a rapidly evolving retail scene by investing in a major upgrade. About $350 million has been invested by institutional funds Charter Hall and ISPT in close proximity to the historic arcade. with redevelopments of Raine Square and Forrest Chase transforming their CBD offerings and luring tenants to shiny new premises.

Outside of the city, billions have been invested in recent years upgrading some of the city’s biggest shopping centres, with $350 million recently spent at Westfield Carousel. and the ongoing $800 million redevelopment of Karrinyup Shopping Centre the state’s biggest construction project outside of the resources sector.
In the past two years. more than 300 new tenancies have been created via new developments or expansions of existing centres, including DFO Perth at Perth Airport, Raine Square, Westfield Carousel. Forrest Chase, and Mandurah Forum.

And according to the centre owners, most of which are ASX-listed entities or superannuation funds, those new shops are more than 95 per cent occupied.

Lease Equity managing director Jim Tsagalis said the unprecedented investment in Perth’s biggest shopping centres had substantially increased competition to sign up tenants, which in turn contributed greatly to the proliferation of vacant shops not just in the CBD, but also in high streets across the city. “What’s happening is the landlord is taking by far the greater risk, and given the fact that those developments were kicked off prior to the issues in the market, the plane has taken off and it needs to land,” Mr Tsagalis told Business News.

“I won’t say that they give tenancies away, but they certainly find very creative ways to lease them.” Much of the commentary around Perth’s retail struggles has focused on rents, and whether landlords were willing to meet a changing market of reduced retail spending. But Mr Tsagalis said that analysis was too simplistic. It’s certainly not a question in our experience of landlords’ willingness to transact,” he said.

“In a general sense, landlords are all educated or aware of where the market is and the fact that the commercial terms that need to be struck are not what they might have been previously.

“There certainly seems to be some quarters suggesting that landlords are not meeting the market, but that’s simply not the case.” Instead, Mr Tsagalis said a range of factors had converged to create what he described as the perfect storm for retail property, with the state’s wider economy, albeit at the nascent stages of recovery, one of the biggest contributors.

“There has been a very sharp decline in the economy and there has been increased pressure through a lot of listed companies, the miners and the like, to reduce costs,” he said.  “That’s had a trickle-down effect, making people really pull their belts in.”

“There has been a Royal Commission in the banking industry, so there wouldn’t be a person who either hasn’t been told by their bank that they have to stop spending or they can’t get finance because the pool of funds being lent has been reduced.

“The number of new housing starts is around an all-time low, that has a negative multiplier effect; then add to all of that, when there was a change to the planning legislation to an activity centre platform, every major landlord, shopping centre-wise, jumped at it, there was a huge uptick in supply. There are quite a few factors happening at once. The greedy landlord piece is a really naive take on it.”

JLL WA head of retail properties Ann Manifis agreed that Perth’s retail problems could not be entirely blamed on landlords, who she described as a cautiously optimistic bunch. Ms Manifis said while many landlords had recognised the various headwinds affecting retail property, those who were willing to invest were experiencing leasing success.

The landlords we are working with, without a doubt they tell us it’s a more challenging market, but if we have a centre where landlords are investing in their centre and understanding what’s happening with the market, knowing where it sits with its target demographic and market, we are having success, without a doubt,” Ms Manifis told Business News.

“At the end of the day they still see retail as a solid investment, which is evident in JLL’s management portfolio. If they are doing their market research and know what their consumers are responding to, they are the ones who have success. But also if a vacancy does become available it’s about looking at that space not just how it is, it is what can be done with it potentially.  At some of our assets we have done some remixing or split up a tenancy or combined it with others, to be able to get that right outcome not only for the centre but for the landlord as well.”

Ms Manifis said JLL had identified significant opportunity for new retailers, particularly in food and beverage and services such as hairdressers and beauticians, and wellness providers such as massage therapists.

However, she cautioned new entrants to the market to be mindful that they were not just following a fad or a short- term trend. “If there was a new business out there looking to start, it’s about finding that niche and how you are going to fulfil that space that isn’t being met in the market at this point in time,” Ms Manifis said.

“Wellness is a huge trend, retailers are starting to play in that space; it’s just whether they are able to get into that traditional brick and mortar shop at this stage. They need to make sure that if they are wanting to go into that shopfront, they need to have a solid plan behind them. It’s not just about opening a door and hoping customers come. They need to have a plan behind them, which includes an online presence so they are able to deliver that way as well.  The days are gone where you can make the assumption that you don’t need to do anything other than have a shopfront, because consumers can readily access information, so how we want to shop has changed.”