For many years there has been intense debate across the retail and shopping centre industries concerning how retail leases are regulated and issues surrounding distortions in market power.
There has been numerous reviews by the Productivity Commission resulting in the lodgement of significant numbers of submissions from both sides of the debate. In addition each of the state governments have also conducted their own reviews which have also consumed considerable amounts of public and private resources. Although some progress has been made towards uniformity, there are still eight separate sets of legislation in force, each with unique aspects to be considered when entering into a lease in each of the jurisdictions. Not an ideal outcome after all of the time and resources expended.
However this impasse would seem not to be the main concern of retailers during this extended period of negative to poor sales growth. Comments from members would indicate that it is total occupancy costs relative to sales volumes that present the greatest challenge. In particular the relationship between the escalation rates in leases and base rental levels are causing serious financial stress in many businesses. Inflexible base rental levels together with escalation rates far in excess of inflation and any sales growth trends are causing long term changes in the industry. Small retailers are being forced out of the industry at great personal cost and larger chains are having to change their operating models to survive. The changes include trying to sell into the digital space to create cross subsidies or compromise their service standards by reducing staff levels. All of this has to be viewed against a back drop of rigid labour market conditions and intense price competition.
Australian retailers are renowned for their resilience and ability to innovate under changing conditions. So why is it at lease renewal time, when they are presented with a lease often requiring an unnecessary refit, a rental increase when sales are flat or declining and escalation rates of up to 5% increase per annum, they eventually re-sign? This is a very complex question and has a lot to do with the effective localized monopoly power enjoyed by large shopping centres and access costs. That is, if you want to sell your product into a certain geographical area and access high foot traffic, the choices are limited. However despite how successful a shopping centre is, the above scenario is not sustainable in the long run.
A funds manager commented to me a short time ago that shopping centre prices were too high and on another occasion, a senior leasing executive remarked that yields from the assets were too low. Perhaps this is why there is so much pressure being placed on leasing executives to extract unrealistic rental increases from retailers. On another level it would seem to be a lost opportunity that some of those excess institutional funds could not flow into worthwhile national infrastructure projects.
So the Productivity Commission have effectively placed this one in the too hard basket and are reluctant to intervene in the market, while the ACCC have limited scope in this area. In fact one would trust that it doesn’t require regulatory intervention and that ultimately, common sense and goodwill may prevail.