Report blames retail rents for high product prices

Exorbitant retail rents are to blame for high retail prices according to a new report, adding weight to the Productivity Commission’s recommendations on planning and zoning.

A report by the Centre for Independent Studies blames tax and regulation for driving up consumer prices, describing Australia as “one of the most expensive addresses on the planet”.

“[This] was by no means unavoidable. Quite the opposite would have been possible,” the report said.

The report’s authors – Oliver Marc Hartwich and Rebecca Gill – blame policies that protect markets from imports for increasing the costs of items such as bananas, books and cars.

It also raises concerns over policies that “artificially stimulate demand”, such as negative gearing and first homeowners’ grants, for surging housing costs.

Meanwhile, policies that increase the cost of production, such as planning and zoning rules, are to blame for driving consumers from the shops.

The report urges the government to adopt the Productivity Commission’s recommendations on retail, including relaxing planning and zoning laws to make it easier for new retailers to compete.

In its final report on the state of Australian retail, the Commission calls on local and state governments to broaden business zoning and reduce “prescriptive” planning requirements.

“[This would] allow the location of all retail formats in existing business zones to ensure that competition is not needlessly restricted,” the Commission said.

Hartwich and Gill say consumers are paying the price for land-use policies that have pushed up the prices for land, increased the cost of goods and locked out new retailers.

“The Commission proposes a radical shake-up of the planning system to open up the market to new entrants,” the authors say in their report.

“This would require the reduction of restrictive planning requirements and the removal of commercial viability testing for new shopping areas.”

According to the report, the limited availability of retail space also makes it difficult for new competitors to establish themselves in the market.

“Discount retail chain ALDI has repeatedly complained about restrictive planning and zoning laws, which held back the chain’s plans for expansion in Australia for many years,” it said.

Russell Zimmerman, executive director of the Australian Retailers Association, says the report highlights the need to review planning and zoning restrictions.

“[The] retail tenancy framework… skews lease negotiations in favour of landlords and drives up rental costs for retailers who ultimately have to pass these on to the consumer,” he says.

The report asks, “How can the average rent in an Australian Westfield centre be broadly equivalent to some of the more expensive US prime retail locations like Miami’s Lincoln Road?”

“Westfield claims that the high-looking Australian rents would look much lower if they were discounted for the currently very strong Australian dollar.”

“However, the exchange rate argument does not quite hold. Even after such discounting, Australian Westfield rents would still be significantly higher than its American stores.”

“To make shopping in Australia more affordable, it is necessary to reduce rents because they are the main drive behind high retail prices.”

The authors’ suggestions include:

• Supporting the Productivity Commission’s recommendations to relax planning and zoning regulations to increase land supply for retail.
• Preventing planning regulations from being used by established retail-space owners as anticompetitive tools.
• Abolishing commercial viability testing for new shopping areas.