Retail property sector set to rise

The retail property market is showing improved signs in 2010-11, after a soft period during the economic downturn in the Australian economy.

Recent improvements to a range of economic and financial conditions have increased consumer and business confidence levels. This has flowed into the demand for retail goods and services, the main driver of retail demand. The increased demand for retail goods and services has subsequently strengthened the key property fundamentals such as rental rates, property values, occupancy and yields over the year. As result, IBISWorld estimates that revenue for the Retail Property Operators industry in Australia will increase by around 5.3% to $29.34 billion in 2010-11.

This growth in revenue follows a dip for the Retail Property Operators industry, with the effects of the Global Financial Crisis (global financial crisis) felt throughout Australia’s retail market. The reduction in the demand for retail goods and services during 2008-09 negatively affected retail sales volumes, demand for property space and the key property fundamentals. As a result, the industry experienced a fall in revenue in 2008-09, by around 6.5%.

Total industry revenue growth in the immediate future is expected to trend in line with retail spending, with a slight extra boost brought about by rising rental prices. Property owners have remained cautious between 2008 and 2010, preferring to protect occupancy rates rather than secure higher rental rates. With the Australian economy returning to a canter, their appetite for risk is expected to increase. The current five-year average growth rate of 2.5% is set to be eclipsed during the five years through 2015-16, with a 5.5% annual growth forecast.

Industry outlook

IBISWorld forecasts that industry revenue will increase at an average annualised rate of 5.5% in the five years through 2015-16. Revenue growth is expected to be around 4.4% in 2011-12, with a stable economy experiencing retail sales growth, and tightening supply. Incremental increases in interest rates are anticipated early in the five-year outlook, as the Reserve Bank seeks to return to a neutral position on rates.

The industry is expected to experience a steadier level of demand for property space in the coming years. The growth in demand is likely to be a result of improving economic, demographic and financial conditions. These improvements are expected to drive retail sales and the key property fundamentals. As a result, industry revenue is forecast to increase to around $38.33 billion in 2015-16.

Improvements to the domestic economy are expected to largely drive growth in demand for retail space. IBISWorld forecasts retail sales to increase by around 3.8% annually over the next five years, due to the growth in consumer expenditure on retail goods and services. Consumer expenditure is expected to increase because of an improving domestic employment conditions, income levels, and consumer and business sentiment. These improvements to the economy, increased access to finance and additional population growth are expected to play an important role in driving retail expenditure and consequently demand for retail space.

The growth in retail demand over the next five years is predicted to increase property construction and improve the key property fundamentals. Retail development has been slow recently, as a reflection of low demand for property space and the reduced profit conditions for property developers. However, a number of major institutional players (Westfield, Stockland and GPT) have indicated their intention to reactivate their development pipeline as economic conditions and company balance sheets begin to improve. The supply-side is expected to remain in check for the immediate future, maintaining vacancy rates.

Rental rates, property values and yield rates are also expected to be influenced by the increase in demand for property space over the next five years. Asset values across the retail market have begun to recover in 2009-10 and as economic conditions improved, retail demand increased and there was easier access to capital. Rental rates are anticipated to increase as investor and occupier confidence return to the market, and as rental incentives decrease.

Retail yields are expected to continue to firm in the years to come, as rental rates and property values continue to grow in line with increasing retail demand.

Despite increasing interest rates, the withdrawal of the stimulus package and subdued global demand, the Retail Property Operators and Developers industry is expected to grow in the coming years. Improvements to a range of indicators, such as the national economy, employment conditions, population growth, access to finance and business and consumer confidence are expected to drive retail and tenant demand into the future.

Growth in retail sales figures, property values, rental rates and construction levels are anticipated, while occupancy rates are expected to remain quite stable. The result is a forecast improvement to company and thus industry wide revenue and profit margins over the next five years.

Key success factors

• Financial structure of the company: A strong balance sheet and access to funds allows companies to respond to changing economic conditions.
• Management of a high quality assets portfolio: The effective management of assets and tenants enables landlords to maintain high occupancy rates.
• Ability to effectively communicate and negotiate: In the retail property industry it is necessary to acquire quality assets that will grow in terms of their rental rate and capital value as it aids in revenue growth.
• Market research and understanding: The thorough analysis of economic, demographic and property market conditions provides companies with an overview of the industry. This allows them to effectively target opportunities and manage slowing economic conditions.

Barriers to entry

Barriers to entry in this industry are medium and are steady. The Retail Property Operators industry has several barriers that can prevent new companies from establishing. The largest barrier to new property operators is entry costs. In the retail industry, this includes the costs associated with financing and acquiring property assets as well as the initial marketing, development, advertising and research expenses. Direct investment in prime property assets requires significant financial resources and often prevents new entrants from establishing themselves in the market.

Zoning regulations can also be seen as a barrier to entry. Typically controlled by the local governing body, zoning regulations are relatively universal. Each local council has different rules and regulations regarding zoning. Zoning controls the physical development of land, determining which uses may be allocated to each property site. Besides restricting land and building uses, zoning laws also may regulate the dimensional requirements and the density of a development and therefore can act in limiting the availability of suitable land for retail development.

Robert Bryant is the general manager of business information firm IBISWorld. For more on this sector, head here.