Commercial & Industrial Property News Update

Australia - Landlords Slash Retail Rents To Attract New Tenants

September 7, 2012

Amid a subdued retail landscape, Australian landlords are forced to offer discounted rents in order to attract new tenants.

Speciality store sales growth continues to stall and retailing remains subdued, forcing Down Under's biggest shopping centre landlords to slash rentals in order to secure new tenants.

GPT Group said that the leasing spread on new leases signed at its 17 shopping centres have retreated by 10%. Westfield, Australia's largest shopping centre owner, has given up 6% on new leases.

The restructured Centro group, which hold AUD 6.6 billion worth of retail malls under management, said that leasing spread slid 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%, reported the Australian Financial Review.

A key metric that gives an indication of the strength of the retailing sector and the overall economy, the leasing spread represents the percentage increase over rental rates on existing leases versus rental rates on new and renewal leases.

Investment site noted that leasing spread narrow and "some even go into negative territory" during periods of economic weakness.

"As the economy strengthens, and retailers are able to pay more rent, leasing spreads increase," it added.

Westfield co-chief executive Steven Lowry said that the subdued retailing environment had seen lease incentives increase, but added that Westfield was cautious in their usage.

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.

Merrill Lynch research revealed that speciality retailers managed average comparable sales growth of just 0.6% over the past financial year to the end of June.

However, Colliers International said that despite the drop in leasing spreads, the investment outlook for shopping centres anchored by supermarkets and food operators remains healthy.

"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," added 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 AUD 20 million. There is generally strong interest in centres sub-AUD 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," Colliers concluded.

Tags: Shop for rent, Business space, Income properties

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