Tenants force malls to cut rent as sales slump

Details: Written by Bloomberg; Created: 31 May 2012

Myer, the nation’s largest department store chain, will close as many as a quarter of its outlets as leases expire if rental costs, estimated at 52 per cent higher than those paid on average by New York-based Saks, aren’t cut.

Premier Investments, the largest operator of small stores, is closing 50 shops and seeking lower rents at remaining sites.

“The pressure is going to mount on landlords,” Tony Sherlock, the head of property research at Morningstar, said. “Landlords are able to replace exiting tenants, but the new tenants may not be willing to pay the same rent.”

A lack of new supply and an economy that has skirted the global recession has ensured Sydney and Melbourne are in the top 10 most expensive places in the world to rent shops.

Sydney is the third-most expensive city for prime retail rents after New York and Hong Kong, and Melbourne the eighth costliest, according to a November report from CBRE Group.

Rents at major malls in Sydney have not declined since the property broker started records on the city in 1981, while Australia-wide rents have not dropped since 1997.

The priciest retail rents in Sydney cost $13,560 a square metre in the three months ending September 30, CBRE said, versus $US15,244 ($15,609) in New York.

Rents for Sydney’s medium-size malls fell in the three months to March for the first time since 1999, CBRE said.

Australian retail sales unexpectedly fell last month for the first time in 10 months, with a 0.2 per cent drop from March. Spending at department stores led the decline, dropping 1 per cent, the Bureau of Statistics said yesterday.

Stockland, Australia’s biggest diversified property trust, cut rental costs by an average of 21 per cent in the six months to the end of December for the 10 stores that replaced tenants who went into administration, according to the company.

An additional 81 expiring leases resulted in rent cuts of 2.8 per cent for their replacements, while the 102 stores renewing their leases paid 6.1 per cent more.

“It’s economically favourable to retain a retailer than to replace them,” said John Schroder, Stockland’s head of commercial property in Sydney.

Australia’s $240 billion retail industry is pinching pennies as households increase saving to double the rate in the US.