Retail shopping centres Introduction Retail can be defined as the sale of goods and commodities to consumers, usually in smaller quantities as opposed to wholesale. This activity is usually confined to a specialist land use namely the retail shop. Historically, merchants established this class of property where demand and opportunity existed, and settlement therefore was quite a haphazard affair. Corner or local neighbourhood shops were established away from town centres, while in business districts shops naturally grouped together enjoying the cross-pollinating draw of those shoppers that were attracted by the range and variety of goods and services. Strip shopping areas are typical of the older style of shopping settlement, non-coordinated or planned in tenancy mix and fronting busy roads; their size and number very much a function of the surrounding population. Many now suffer from the competing draw of large shopping centres and lack of dedicated parking, loading areas and clearways. At the other end of the spectrum are shopping centres some small, some very large which are planned conglomerates or combinations of shops, highly controlled environments where the variety and type of shop is closely monitored and coordinated. They are typically modern, air-conditioned and have large adjacent and under cover parking areas. These are state-of-the art as far as planning is concerned and it is little wonder that the retail landscape has changed significantly in the last 30 years as shopping centres have grown in number and size. Shopping centres have become the first-choice shopping destination for many consumers seeking the convenience of a one-stop experience that affords a wide-variety of choice. How large? To give you an idea of just how large the retail shopping centre industry is, consider these facts: There are over 900 shopping centres in Australia ranging from large regional centres of more than 100 000 square metres of retail floor Retail shopping centres NSW DET 2006 1
space down to the smaller neighbourhood retail centres or markets of around 5 000 square metres. Across Australia there are over 1.75 billion shopper visits per year, which means every Australian averages visiting a shopping centre twice a week. One Australian in twenty is employed in retail shopping centres, which is close to half a million employees in total. And there is more than a 50% chance that you, the reader, got your first work experience working in the retail industry. Types of retail property The retail property market in Australia has become very sophisticated, mainly due to a small number of owners/investors owning the majority of retail shopping centres. The Property Council of Australia (PCA) has developed definitions for different types of retail property. Briefly, these categories are as follows: City centre Super regional centre Retail premises within an arcade or mall development owned by a single entity (or person) and located within a Centre Business District (CBD). Total GLAR exceeds 1 000 m 2. A major shopping centre with two department stores, one or more Discount Department Stores (DDSs), two supermarkets and around 250 speciality stores. Total GLAR exceeds 85 000 m 2. Major regional centre A major shopping centre which incorporates a full line department, one or more full line DDSs, one or more supermarkets and at least 150 speciality shops. Total GLAR ranges between 50 000 m 2 and 85 000 m 2 Regional centre Sub regional centre A shopping centre that incorporates a full line department store, a full line DDS, one or more supermarkets and at least 100 speciality shops. Total GLAR ranges between 30 000 m 2 and 50 000 m 2. A medium sized centre typically incorporating at least one full line DDS, a major supermarket and at least 40 speciality shops. Total GLA will be between 10 000 m 2 and 30 000 m 2. 2 Retail shopping centres NSW DET 2006
Neighbourhood centre Bulky goods centre Themed Centre Market Strip shops A local shopping centre comprising a supermarket and up to 35 speciality shops. Usually located in residential areas. Total GLA is usually less than 10 000 m 2 A medium to large sized shopping centre dominated by bulky goods retailing occupying large areas to display merchandise. It typically contains a small number of specialty shops. A specialty shopping centre, located primarily in resort areas to cater for specialist tourist needs, which does not normally include a supermarket. A covered area of at least 5000 square metres dominated by food retailing with at least 50 stalls or outlets. It operates on a permanent or irregular basis. An area or street dominated by single tenant shops that rely on passing pedestrians for business. Are also known as high street shops. Well known strip centres include Oxford Street, Paddington and Military Road, Mosman. Retail shopping centres NSW DET 2006 3
Factors affecting the value of retail property There are a number of factors that can affect the value of a retail property. Like other forms of property investment, location plays a big part in the attractiveness of a property. However, the general state of the economy and the level of consumer confidence also affects retail property. Below are the major factors affecting retail property. Location For retailers, location is the most important aspect of their business. Some retailers place more importance on location than others, but generally the location of a property is as important as the rent when a retailer comes to finding new premises. There are a number of factors that form part of the location analysis of a retail property including: the shop frontage the exposure to passing traffic the amount of passing traffic parking available either on or near the property and surrounding development. Each of these items is discussed below. Frontage/exposure The frontage and exposure a retail property has, is a factor in the rent that can be commanded for that property. Generally, retailers prefer properties with a wide frontage that allows a large shopfront to accommodate extensive window displays. The exposure a property has is also important. This refers to the visibility and sightlines a property has either from the road and passing traffic or from pedestrian or foot traffic. 4 Retail shopping centres NSW DET 2006
Traffic The traffic that passes a property, both vehicular and pedestrian, is important to different types of retailers. Stand-alone fast food restaurants such as McDonalds and KFC rely on large volumes of vehicular traffic for their trade. On the other hand, small fashion or homewares boutiques or cafes in strip retail areas rely on passing pedestrians or foot traffic for their business. Parking Parking is one of the most important issues for retailers in any given location. Ease of parking is a critical factor when customers determine their shopping habits. Whilst it is not crucial that a retailer provide parking within the confines of their own property (and it is mostly impossible to do this), it is important that parking is provided at a convenient location nearby with easy access at an affordable rate. Apart from clearways, the slow decline of a number of strip retail locations is directly related to the lack of parking in surrounding areas. This is particularly evident at Parramatta Road between Broadway and Croydon, where retail premises have suffered due to the dual effects of lack of parking and heavy passing vehicular traffic. The heavy traffic in particular, does not contribute to an ambient shopping environment. Surrounding development/retailers Even in strip locations, retailers like to locate together. By locating together, retailers are providing a critical mass of shops and becoming a shopping destination. Surrounding development also needs to contribute to a pleasant or ambient shopping environment. Locations such as Queen Street Woollahra, Oxford Street Paddington and Military Road Mosman are examples of such locations. Demographics The valuer should have regard to the demographics of the suburbs surrounding the retail premises particularly in regard to the type of retail operation that would be successful in that location. Demographics cover all aspects of the population make up and include items such as: age household income Retail shopping centres NSW DET 2006 5
employment occupation education car ownership home ownership, and ethnicity. Whilst demographics are more relevant in shopping centre valuations, it is important for the valuer to take notice of the surrounding population and assess whether the tenant/retailer is suited to the population. An example would be a high fashion retailer located in a suburb whose demographics are characterised as blue-collar worker, high employment and low household income. This evidence would suggest that the retailer would struggle to make sales and therefore meet rental payments. Tenant covenant Similar to the example given above, the type and strength of the tenant is important when valuing a retail property. The strength of the tenant is important to the stability of the rental income of the property, and will influence the yield you place on the income stream. National retailers are considered to have the best covenant, particularly those with a parent company guarantee. With a guarantee in place, the property owner has recourse back to the parent company if the retailer (subsidiary) fails in the future. However, this is not to say that one-off retailers (known as Mum & Dad retailers in the industry) cannot be relied upon. It is important for the valuer to check how long the business has been established, how long it has traded in that location and whether a bank guarantee or security deposit exists. It is standard for owners to have a security deposit equivalent to three to six months of rent, in order to cover any shortfall of rent if the retailer fails. Level of retail sales and consumer confidence The Australian Bureau of Statistics releases retail sales indices for each quarter four times a year. Along with the Consumer Price Index, the level of retail sales is an important indicator of consumer confidence and the general state of the economy. The valuer should be aware of the recent direction of retail sales (rising or falling) when considering the tenant covenant and future potential of a retail property. 6 Retail shopping centres NSW DET 2006
Interest rates Interest rates are again another economic factor that affects trading conditions for retailers. Interest rate rises particularly affect mortgage owners, who form the largest spending group in the population. A rise in interest rates increases mortgage repayments and reduces the amount of money a household has available for discretionary spending particularly for goods such as clothing, leisure, outdoor, gifts, home ware and furniture. Fashion/lifestyle Changes in fashion and lifestyle tend to have a slower impact on retailing but in time can change the trend towards and away from particular retailers. A change in office workforce clothing away from formal suits and towards business casual dress has resulted in: reduced sales of men s and women s suits and business clothing which has traditionally had high margins for retailers (and therefore higher profits) an increase in demand for casual clothing (which, of course, has lower margins as this clothing type is more fashion orientated). Another example is the increased sales in homewares and home entertainment in recent years. This has pushed discretionary spending away from entertainment (cinemas) and fashion clothing. Tenant affordability Another factor that affects retail property is the ability of the retailer/tenant to pay the rent and outgoings. If the quantum of rent is racked beyond affordable levels, then the retailer may not be able to sustain the business thus resulting in default and vacancy. This is neither in the owner s nor the tenant s interests. Different retailer types have different levels of affordability depending on the profit margins of the business type, and the measure is very subjective. Affordability is measured by expressing the rent and outgoings (total occupancy costs) as a percentage of gross annual sales. For example, fashion retailers can afford to pay between 10 15 per cent of gross sales, again, depending on the margins. For example: If the annual gross sales of a fashion retailer are in the order of $900 000 p.a., then the retailer can afford to pay total occupancy costs (rent and outgoings) in a range of: Retail shopping centres NSW DET 2006 7
10% of gross annual sales $90,000 p.a. 15% of gross annual sales $135,000 p.a. This method of rental assessment should be used with caution and only as a rough guide to a tenant s affordability. Other factors such as management, marketing, staff and merchandise all affect a retailer s gross sales and therefore their ability to pay rent. 8 Retail shopping centres NSW DET 2006