When the Lowys sell, the rest of us had better pay attention

They have done it time and time again, even during the global financial crisis when most listed property trusts blew up or got themselves into huge debt.

The fact that they opted to sell out of one of the Westfield property trusts at a 10 per cent discount to net tangible asset (NTA) backing could be a portent of more to come. Industry talk is that the other Westfield property trust will sell down its Australian and New Zealand property portfolio.

The decision to sell out, which has raised $660 million, comes at an interesting time in retail, as the structural changes in retail gather momentum. The latest online sales figures released by NAB on Monday show that online sales rose to $13 billion, which is equivalent to 5.8 per cent of the country’s $222 billion worth of traditional sales (excluding food).

What is even more telling is that online sales grew 27 per cent over the 12 months. Traditional retail property management flatlined, rising 0.4 per cent in the year to December 31.

As customers shift their shop experience online rather than visit stores, the impact on shopping centres and the amount they can charge on leases, will intensify.

Indeed, colleague Carolyn Cummins picked up some pertinent comments made by Westfield’s Peter Lowy at an investor briefing last week that, if sales growth in Australia did not pick up, rents might have to fall.

This was a profound admission, especially given the deteriorating trend in the trust’s full-year net operating income. In 2011 net operating income was 4.3 per cent, slowing to 2.9 per cent in 2012 and forecast to slow further in 2013 to between 1.5 per cent and 2 per cent.

How much further net operating income will slide is hard to tell, but property experts for some time have been expecting a ”downward structural reset in the retail sector” through higher vacancy rates and fewer developments.

Macquarie Equities issued a report saying the Lowys’ exit at a discount to NTA raises the question as to whether the family ”indeed believe the NTA (or at least why they would sell at such a discount), which is interesting in light of the fact that Westfield Group are Westfield Retail Trust’s joint-venture owners in the same portfolio.”

The structural changes going on in the retail sector, including high labour costs, high rental costs, a strong Australian dollar, more product choice and relatively cheaper prices on offer from overseas online sites, has repercussions for retail property management trusts, property valuations and the retailers themselves.

The simple truth is traditional retail in Australia is not set up for online because the cost structure has been set up for customers who come into the stores. It explains why online sales represent less than 1 per cent of Myer’s total turnover. It is a similar story at David Jones, which recently announced a 1.4 per cent fall in sales for the three months to January and vowed it would no longer sell DVDs, computer games or televisions because it was too hard to compete with international online competition, partly because they get a free kick when it comes to tax.

Right now international online websites don’t pay GST on products with a price tag of less than $1000. This is one of the highest thresholds in the world and retailers have argued that the disparity is hurting their business.

Shopping centres have been able to charge high rentals, but if sales keep going backwards and some stores close down, high rentals may become a thing of the past.

A survey conducted late last year by Credit Suisse using a panel of upper-income shoppers found that overseas websites were superior to the local department stores. Each respondent was given $500 to $1000 to spend online at David Jones, Myer, US department store Nordstrom and Net-a-Porter. Nordstrom was the clear winner, 73 per cent of the funds spent there, 16 per cent at David Jones, 7 per cent at Myer and 4 per cent at designer site Net-a-Porter.

When it comes to listed property trusts, gearing is generally low and many big vehicles, including the two Westfield trusts, GPT, Dexus, Stockland and Mirvac, need meaningful acquisitions to grow.

While there is some development, there isn’t much due to limited demand both for office space and retail. In retail there is demand from overseas retailers but it will hit the market for Australian fashion.

As one property expert said: ”After de-gearing and stabilising over recent years, the pressure is on REIT CEOs to demonstrate growth. However, investors will not tolerate gearing up, offshore growth or excessive development risk. Realistic and executable merger and acquisitions, enhancing scale, asset quality and diversification is likely to be highly rewarded.”

But it won’t be easy; hence the plethora of buybacks in the past year. The rise of the internet has brought big changes to many industries. It is still early days in retail but as more people shop online, the implications will become clearer for shopping centres.



Source: http://m.smh.com.au/business/when-the-lowys-sell-the-rest-of-us-had-better-pay-attention-20130304-2fgwx.html