BIS Shrapnel forecasts 3% retail turnover growth, despite gloomy headlines

Retail property had been caught in the perfect storm, according to BIS Shrapnel, but the mining boom might soon help loosen the purse strings of consumers.

"Not only have economic factors and consumer sentiment resulted in the slowest rate of turnover growth in decades, but what little spending is occurring is increasingly online and overseas," the report concludes.

But it still forecast solid returns despite the current turbulence – barring a collapse in the Australian dollar or a much faster rate of growth of online shopping.

“There is a lot of truth in the negative headlines, but that doesn’t mean it will stay that way,” says BIS Shrapnel senior project manager Maria Lee.

“The main problem at present is sentiment.”

It was the poor sentiment that has driven the household savings rate up to a 24-year high, its Retail Property Market Forecasts and Strategies 2011–2021 report says.

“As long as the savings rate is on the rise, consumer spending won’t keep pace with household income growth.

“However, at some stage the savings rate will level off and allow the pace of consumer spending and retail turnover growth to pick up.

“When exactly this will occur is difficult to pinpoint.

“Given the negative news constantly being created around the world, consumer spending could well remain weak for some months.

“But as the mining boom gains traction, underpinning firmer economic growth and thereby boosting the household capacity to spend, consumers are expected to loosen the purse strings.

“That is the key to stronger growth in retail turnover, and we expect it will become apparent through 2012,” Lee says.

BIS Shrapnel forecasts long-term retail turnover growth to average over 3% a year in real terms.

“This represents a more than doubling from the pace of growth recorded in 2010–11, though it does not mark a return to the glory days of retail.”

Average retail growth turnover over the decade to 2007 reached 4.4% a year during the debt-fuelled spending binge prior to the GFC.

BIS Shrapnel’s report warns that there is a big difference between aggregate growth in retail turnover and the turnover flowing through regional and sub-regional shopping centres, and then it’s a further step from shopping centre turnover growth to centre income growth.

“There are many dilutionary influences along the way, most notably internet shopping, growth in retail floorspace, high occupancy costs, over-rented tenancies, the requirement for leasing incentives and – though not immediately – pressure on retailers’ profits and capacity to pay rents from a potential slump in the Australian dollar.”

“What’s saving retailers at the moment – though they may not feel they are being saved – is the strength of the Australian dollar.

“This has enabled them to engage in competitive price discounting while retaining what are still historically high profit margins,” Lee says.

“Compared to previous economic downturns, there have been remarkably few retail failures post-GFC.”

“The key difference between the 1980s, the 1990s and now is that average profit margins are around twice as high.”