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Fire Sale: Property Operators Carry the Recession Burden

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by James Thomson
Jun 16 2020

The COVID-19 pandemic has hit Australia’s retail and commercial property operators hard. Social distancing measures and the general slowdown in economic activity have reduced revenue for many retail and commercial businesses, making it difficult for some firms to meet their rental obligations.

At the height of the outbreak, many retailers shut their doors or reduced operating hours, with foot traffic in major retail areas down by over 50%. Some major retail property operators, such as Vicinity Centres and GPT Group, have announced expected write downs of up to 13% on their property portfolio values. While major retail property operators have a broad tenant base, better placing them to weather the storm, smaller operators are anticipated to struggle over 2020-21.

‘It was already a tough operating environment for retailers prior to the COVID-19 outbreak. The current conditions caused by the pandemic are likely to contribute to an increase in retail store closures over the rest of the year,’ said IBISWorld Senior Industry Analyst James Thomson.

Rent protections for small businesses

Small retailers are protected from eviction, but this protection is temporary and will cease when the JobKeeper Scheme comes to an end in September 2020. The Code of Conduct for SME Commercial Leasing Principles, which was introduced by the Federal Government in April 2020, provides guidelines for rent reductions, freezes on rent increases and prohibits the termination of leases or evictions for non-payment of rent. According to the Shopping Centre Council of Australia, over 5000 small and medium sized businesses had entered into rent-relief agreements with their landlords by mid-May.

‘When rent-relief protections are removed, some business operators are likely to face eviction. However, given the weak retail environment, commercial property operators may be unable to find replacement tenants. This result will likely force landlords to accept lower rent yields,’ said Mr Thomson.

Some larger retailers, such as Accent Group, are taking the opportunity to renegotiate lease terms with their landlords. These agreements are anticipated to weigh on revenue for the Retail Property Operators industry, which totalled $31.9 billion in 2018-19.

Online shift

While grocery retailing has remained relatively robust throughout the lockdown period, other retail operators have experienced deteriorating demand. Clothing, footwear and personal accessory sales fell by over 50% in April 2020, while department store sales fell almost 15%.

‘The COVID-19 pandemic has created significant headwinds for bricks-and-mortar retailers. Consumers have shifted to online retail platforms, with some unlikely to return to traditional in-store shopping when social distancing rules are lifted,’ said Mr Thomson.

Online channels grew to account for over 20% of total sales of household goods, clothing, footwear and accessories in April 2020. The COVID-19 outbreak is anticipated to support the shift towards online retail, leading some businesses to reconsider their bricks and mortar presence and reduce their physical retail footprint.

‘With COVID-19 normalising remote working arrangements, consumers are anticipated to shop from home, leading to weaker demand for retail space and lower rental yields and retail property prices,’ said Mr Thomson.

Outlook

Despite the current gloom in the retail sector, there are some encouraging signs of recovery. Australian states and territories have gradually moved to relax lockdown restrictions. At the end of May, property operators Scentre Group and Vicinity Centres, reported that approximately 80% of retail tenants were now open, up from around 50-60% at the start of the month.

For commercial property operators, the pandemic has highlighted the importance of having reliable tenants with robust businesses. Landlords benefit from ensuring they have a diverse tenant mix, including a high proportion of non-discretionary businesses, which are more insulated from economic downturns.

‘Retail property operators benefit from a strong anchor tenant to attract foot traffic to their locations. We have seen retail sales among those anchor tenants hold up comparatively well. Anchor tenants are businesses like the major supermarkets, or Bunnings and Officeworks,’ said Mr Thomson.

IBISWorld reports used to develop this release:

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Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647

Email: mediarelations@ibisworld.com