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Written by Per Amundsen, Head of Research, Thinktank
It was December 2021, after nearly two years of lockdown, that the Thinktank Monthly Report struck a slightly more optimistic note about the retail property sector. To quote: “Retail continues to be showing initial signs of recovery and indications of a turnaround as we see the end of lockdowns”. We were understandably cautious, but, nonetheless, we were finally seeing some green shoots.
Make no mistake, of all the commercial property sectors, retail has been the most impacted due to COVID. Severe, sustained lockdowns forced large swathes of retailers across the country to shut their doors for months on end – and many will never open again.
Online shopping, an optional extra before COVID, quickly became the norm for a wider range of items, often out of necessity. What was once the domain of the takeaway and books spread to just about every conceivable consumer demand. So much so that it has led some analysts to question the long-term viability of the physical retail sector, and, by extension, the investment logic of retail bricks-and-mortar.
At Thinktank, we are not convinced. No one expects retail to return to exactly what it was pre-COVID. But to talk of the demise of the sector, is, in our opinion, overstating the case. As our monthly reports since December highlight, retail is picking up as people flock back to many, though not all, stores.
It’s not just anecdotal evidence such as full carparks at shopping complexes. [Try getting a spot at Melbourne’s ultimate shopping experience, Chadstone, on a Saturday afternoon.] Figures show 30-day rental collections were back to 88% in February compared with a yearly low of 75% in October 2021. Another straw in the wind are the longer lease agreements being signed. And, most tellingly, ABS April 2022 retail trade data revealed ongoing growth in retail spending, up 0.9 per cent for the month and 9.6 per cent for the year. In another sign of the changes taking place in the sector, department store sales were down 2.5 per cent for the month.
So, what does Thinktank’s crystal ball predict about the future of retail? First and foremost, online shopping will continue to expand, and those physical retailers that don’t adapt will likely wither on the retail vine. The evidence during the pandemic is that those non-staple retailers without an effective online presence, or, even worse, none, took the biggest hits; their revenue shrivelled up during long lockdowns. As we emerge from COVID, or, more accurately, learn to live with it, retailers can help foolproof their businesses by opening multiple revenue streams to generate sales.
The evidence suggests they can evolve, in no small part due to greater use of data that allows them to get a better understanding of consumer behaviour, whether it be online or physically. What the analytics can show retailers is how often customers shop, what they’re shopping for and how they wish to be serviced. [Data also assists retail property owners to better decide on their tenant mix to maximise customer traffic].
What retailers must do, in our opinion, is offer convenient multi-channel shopping options, fulfill their customers time expectations when shopping online and provide an immersive consumer experience for those who prefer the physical experience. What this means is a major renovation of the physical shopping experience. Many types of shops will no longer just offer our daily essentials; they will be aiming to offer a “holistic experience” that enriches people’s experience by evolving into places where people not only shop but live, work, exercise, socialise, and dine.
What’s also emerging, again in large part due to COVID, is more support and flexibility from landlords. It is manifesting itself in two ways. First, the length of lease is shortening. This does not contradict our comment above that one sign of a revitalised retail sector is lengthening leases. What is does say is that the sector is unlikely to return en masse to the five and 10-year leases of yesteryear. There is simply too much uncertainty and variability in the structure of business for that to realistically happen. Expect closer to three years to become the norm.
Another interesting development is the shift away from leases with a base rent. Instead, many tenants prefer a turnover rent where it is calculated as a fixed percentage of their monthly gross takings. This trend was emerging before COVID as one response to the growth in online shopping; but the pandemic is certainly making it a greater focus for landlords and tenants.
Perhaps what’s more interesting is that many landlords understand this, aware that it’s better to have a retailer in store and earning than having an empty shop front. It’s certainly not just altruism. Every failed retailer means an empty premise, inevitably placing downward pressure on property values.
A final point has been the COVID-induced growth in regional Australia that has included retail. While the focus has been on regional housing, people moving out of the cities and into regional centres has generated economic activity and pushed up prices for retail property – in effect, a mini-boom. But be wary. This may begin to reverse as rates rise and second homes in coastal and regional locations are put back on the market.
Retail is part of our collective DNA. From Ancient Greece where merchants started using city centres to sell their wares in about 800BC to the generational family run stores of the 1700s and 1800s, department stores in the mid-1900s, credit in the 1920s, and shopping malls in the 1950s. Over nearly three millennia, stores, markets, shopping malls, have been a place to both shop and socialise. Online shopping will change this– it won’t stop it.
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