The recent spate of retailer closures has thrown the retail industry into a state of concern. Most commentary has been focussed on the "Amazon issue". To me that is an enigma, and I believe retailer receiverships have far wider causes than just Amazon’s arrival in this corner of the world. These store closures also have broader consequences for the property and retail industry.
I cut my teeth on the shopping centre industry, being one of the first to be involved, and I have had the opportunity to see the growth of the industry throughout the country, over the past nearly 50 odd years. The formula for success was simple, a car park and a covered mall with a couple of anchor tenants and a group of specialty stores. The first centres were developed in Auckland and Christchurch, followed soon after by Wellington. The regions followed thereafter. The success of shopping centres was quickly apparent.
In 2017, the major centre in New Zealand is probably the Kiwi Property owned Sylvia Park in Auckland. Auckland is well represented by Regional shopping centres, but Sylvia Park is a real hub and in my view has taken over in the lead role as the nation’s number one. Christchurch has Riccarton and Northlands, and Wellington has Queensgate. The success of each centre is driven by its tenants and most centres are concentrating on widening the offering beyond retail, with new international retailers added where they can be encouraged. Those centres that don't change will be in trouble from 2018, and beyond.
My view is that the traditional retailer is looking beyond the shopping centre and all it has to offer to greener pastures on the strip. The cause for this change is obvious. Shopping centre owners generally have become mesmerised by rental growth and retailers are finding this unsustainable. Hence retailer closures, driven by high rents versus the inability to achieve sales to match the outgoings.
The immediate future therefore for shopping centres will be one of significant change to enable them to survive the reduction in retailer and tenant leasing interest. Shopping centres need a variety of retailers to enable them to offer customers a range of goods that entice shoppers to visit, boring centres with a limited range of merchandise will suffer. As a result, retailers will become hot property for shopping centre owners, than ever before, and I suspect that there will be a change to the mind-set of developers and owners with rentals being adjusted to attract suitable retail tenants for the space that is on offer. Conversely the space will be empty and financiers will come snapping at the door.
The result therefore for shopping centre owners is likely to be a decline in centre property values. Long leases will be replaced with shorter terms and affordable base rentals or percentage rentals based on turnover. Tenant retention versus empty space will be paramount. Hence, the need therefore to redevelop centres and to encourage other commercial and entertainment environments.
Whilst Cinema facilities always are attractive to developers, and as a result encourage food and beverage facilities to follow, the return on investment from cinemas is marginal at best, consequently a relatively high level of rent has to apply to food and beverage facilities. I see this being a problem for centre owners. Building a major shopping centre and maintaining a high level of income will be difficult into the future. Anchor tenants like department stores and supermarkets, plus cinema complexes make a centre work; however the total combination is thirsty for land area or occupied space and extremely lean in revenue for the developer. Hence my concern for the future of the industry, as speciality stores will not be able to cope with the rental that will be needed from them to subsidise the larger occupiers.
Certainly, highly geared shopping centre owners will be seriously considering the future of their property portfolios into the future. What we are now seeing as a result is the syndication of shopping centres as a potential attraction for a smaller combination of mum and pop investors, offering high returns. The trap will be tenant retention versus the lease term on offer, and of course the quality of the tenant. Hence the quality of the investment!!!
I suggest that the word "Amazon" is the tip of the iceberg. Certainly whilst retailers have their concerns, the wider implication is the impact on the traditional shopping centre. Maybe this is the reason why there have been few major shopping centres developed over recent times, and those that have been developed have struggled!
Vital Healthcare Property Trust is looking both vital and healthy, with a portfolio now valued at $1.3 billion. This consists of healthcare properties (hospitals, clinics etc) in New Zealand and Australia, backed by an unparalleled WALT (weighted average lease term) of 17.7 years.
Vital’s portfolio brings in $90 million a year in net rent, but their overall value as a company has been boosted hugely by a rising market – with property values rising by $169 million in the last year, giving them a total after-tax profit of $218 million.
Although it began in New Zealand, Vital now does most of its business across the Tasman, including some major hospital developments which it has underway. Still, Vital has more than $200 million of New Zealand property, including Ascot Hospital and surrounding buildings, and hospitals and health buildings in Albany, Lower Hutt, Whangarei and Napier.
In the Press
Property owners taking a hit leaving the housing market
The slowdown in the housing market is causing sellers to take bigger losses on house sales. The quarterly Pain and Gain report from CoreLogic showed that while the number of people taking a loss is trending down, the amount they lose has increased. The report is a quarterly analysis of homes which were resold over the quarter.
805 new car parks 'give Christchurch businesses confidence to return to city centre'.
More car parking is expected to promote the return of businesses to central Christchurch. The Lichfield Street Car Park, with 805 car parking spaces and capacity for 96 bikes, will open to the public on November 10. It will provide easy access to the retail precinct, including Ballantynes and City Mall.
Hamilton calls for Amazon
Hamilton has made a bold move and has publicly expressed its interest in being the first location for an Amazon New Zealand headquarters. The retail giant is opening its Melbourne location end of this year, but has neither confirmed or denied a move to New Zealand shores.
Rebuild leaves Christchurch with a glut of office space, while Wellington's vacancy falls close to zero
Office space markets in two of New Zealand's largest cities are facing opposite pressures, a new report shows. The latest Colliers International CBD Office Report shows Christchurch now has a surplus of office space as the central city rebuild winds down, while seismic issues have left Wellington with almost no available prime space.