2010 Retail Forecast

Feb 3rd, 2010

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Notwithstanding some encouraging results posted in recent months, many analysts are maintaining a “cautiously optimistic” forecast for the upcoming 2010 retail market. There are some significant underlying benefits for retailers within recent market shifts that will enhance profitability this year and, therefore, ease concerns regarding commercial lease terms.

Australia has reduced import tariffs on footwear and apparel as of 1 January from 27% to 17%. Adding to this benefit is the substantial improvement in the Australian Dollar. Of course, hedging policies of any retailer will have a major influence on risk vs. opportunity to capitalise on such changes.

Food retailers, both fresh and pre-prepared (cafes, etc.), will need to increase prices due to the rising cost of water (agriculture) and fuel (transport). Our tip is for plus 4% food inflation levels which will greatly assist turnovers achieved by supermarkets and, therefore, the potential return to Landlords through percentage rentals.

Watch out also for the effect of trading hour deregulation. Whilst only limited, this will hasten the National Supermarket tenants’ metamorphosis into different store sizes to meet the inner city land and rent limitations. This will also advance their investment in "take home" and value-added meals for increasingly time-poor customers. These initiatives will further drive up turnovers.

Independents will also be forced to "lift their game" as the likelihood of total trading hour deregulation looms. They can no longer rely on 25-40% of their business being done out of normal trading hours with little real competition. As such, look out for Independents to offer innovative fit outs and concepts that match demographics more closely. They have the flexibility to be more nimble than their National counterparts, and as the operator owns the store, they will be more able to respond to customer needs. Of course this is a generalisation, but the message is don't write Independents off with your clients, they just may be what your centres need. In any regard, supermarket retailers are now more than ever able to pay increases in rental over, what has up until now, been accepted levels.

We are also seeing an increased level of sophistication in the Perth retail market. Offerings such as Greenhouse at enex100, Wesley Quarter, One40William, Claremont Quarter’s Stage 2, City Square & some very chic new bars featuring within the City of Perth’s laneway activation plan, are changing the landscape significantly. With the mining boom about to restart, we need to continue to explore the opportunities for International, interstate and innovative local offerings. These will now be looked at more seriously by retailers. For restaurants, think Rockpool and Vue de Monde type eateries; for retailers, Omega, Sass and Bide and Rhodes and Beckett are where the new market pitch can be set.

2008/09 will be remembered as one of the toughest periods to raise funds across the board. Loans for retail store expansion was one of the most severely affected in the credit markets. Most domestic banks are now discussing "opening" their loan books more favourably in 2010. This ultimately will be one of the major drivers for retail property rental growth and retail development.

Now is the time to revisit investment and development options.

Jim Tsagalis
Managing Director
Lease Equity
(08) 9426 1777
GreaterValue@lease-equity.com.au

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