Commercial leases continue to cripple retailers

The increasing cost of commercial leases is only adding to the financial pressure on bricks-and-mortar retailers, according to small business lobbyist Peter Strong.

Strong, the executive director of the Council of Small Business of Australia, says the retail sector is already suffering as more customers shop online from overseas websites.

“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,” Strong says.

“Yet the landlords around the country continue to increase their rents.”

“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?”

A recent report by CB Richard Ellis revealed Sydney, Melbourne and Brisbane are in the top 10 most expensive retail markets in the world.

The report found super prime rents in Sydney have risen as high as $13,560 a square metre, while Melbourne rents reach up to $6,500 a square metre, and Brisbane commands a top rental of $7,845 a square metre.

Josh Loudoun, CBRE director of retail services for the Pacific region, says rents will rise as long as demand continues to outweigh supply, which is being driven by the increasing interest from international retailers.

“Australia is an expensive retail market… [because] we don’t have an oversupply of retail markets,” he says.

Michael Lonie, National Retailers Association spokesperson, says retailers need to do their research before committing to a commercial lease.

“When a retailer enters into a lease, they essentially sign a contract on a mortgage, which is usually for five years,” Lonie says.

“Within a lease, just about all of them have an escalation. Escalation is, at best, a CPI which normally would reflect price growth but many are for rates – 4% or 5%.”

“Very few small retailers do a cashflow or projection for what their rents are going to be for the term of the lease.”

“More importantly, they don’t look at an estimate as to what the sales performance is going to have to be to ensure they can do the necessary turnover to afford that rent.”

Lonie says prospective buyers should seek professional advice from a property specialist before entering into any commercial lease.

“Many retailers, especially smaller ones, will not spend the money [on professional advice] yet they’re looking at investing a quarter of a $1 million,” he says.