Experts play down warning that rise in online sales could create retail property bubble

One of Australia’s leading property researchers has played down a warning from the Council of Small Business of Australia that the growing number of Australians shopping on overseas websites could force physical retailers to downsize or close, creating big problems for retail landlords.

COSBOA chief Peter Strong claims that while retail rents continue to rise, Australian retailers are being hit with a series of structural changes, including the rise of overseas eCommerce sites, which he says is being aided by the fact that the GST threshold on overseas sales has been set too high at $1,000.

“The fact that the Myer Group is setting up offshore and that even Gerry Harvey has expressed deep concern about the unfairness of GST impositions on local sellers are indications that all is changing and will continue to change. Yet the landlords around the country continue to increase their rents,” Strong says.

He argues that if Myer and Harvey Norman were to set up in China, they would reduce their physical presence in shopping centres. He says that other stores would need to close or downsize in the face of rising costs and falling sales.

“How long can the big landlords justify their greed until they realise that it won’t work, that the shops will become empty unless they have rents that reflect the level of sales? Given that so much of our super funds are invested in property trusts we all have an interest in making sure the bubble doesn’t get out of control.”

However, ANZ Bank’s head of property research, Paul Braddick, has played down the impact that the increase in overseas online sales is having on Australian retail and the retail property market.

Braddick says ANZ has struggled to find data on the level of online retail sales, but his team were able to pose the question to the Reserve Bank of Australia Assistant Governor Philip Lowe during a recent meeting.

“As far as they have been able to determine, they still think it is at a very low level,” Braddick says.

“It’s growing quickly, and it could be a concern in the long-term, but that’s not what they see as the main reason for the soft retail conditions.”

Braddick says weak consumer confidence (weighed down by recent rate rises) and increased savings rates were nominated by the RBA as the main reasons retail sales have been soft.

While Braddick says growing online retail sales will have an impact on Australian retail sales and therefore retail rents and valuations, the timeframe is difficult to determine.

“The further you are willing to go out, it’s a no brainer that it will become an increasingly important channel.”

He also agrees that retailers may shift towards smaller store formats, particularly in what he describes as “homogenous” categories like music and books, where competing with low-cost online retailers is getting difficult.

However, these are longer-term trends. In the shorter-term, Braddick is not seeing an increase in retail rents, with data showing retail rental increases remain just above inflation.

“The data shows there are very minor upward moves in retail rents, but nothing significant. There might be individual cases where rates are moving higher, but it is not showing up at the broader level.”

Braddick is also optimistic that the retail cycle will soon turn, as household income, wages and job security improves.

“The bottom line is that the broad economic backdrop is still very positive.”