Tenant blues won't hurt Westfield

Steven Lowy is well-pleased with the performance of Westfield Group, which yesterday confirmed its full-year earnings guidance. Westfield’s Australian tenants, however, probably aren’t quite as happy with their experience over that period. 

Westfield’s Australasian centres are virtually fully leased and the average specialty store rent in those centres for the nine months to the end of September was up 3.8%. 

The tenant experience, however, wasn’t as positive. Sales generated by Westfield’s major retailers are down 2% on the same nine months last year and are deteriorating – they were down 3.8% in the September quarter. 

The ‘mini majors’ in the group’s centres fared somewhat better, with sales down one per cent against the nine months to end-September last year but up 3.2 per cent in the latest quarter. Specialty stores are up 1.1% for the year to date but down 1.4 per cent in the September quarter.

Overall, the turnover in its centres is down 0.5% on the same nine months last year and 1.7% in the latest quarter.

That’s with the broader picture of a volatile and deteriorating retail sector where the department stores – full service in particular but discount department stores as well – are being hit hardest and where specialist fashion, footwear and homewares stores are being impacted by the deep conservatism of consumers who have savings but won’t spend them.

With sales falling and occupancy costs continuing to edge up it is little wonder the retailers are squealing, although they will all be hoping and praying that the Reserve Bank’s reduction in official rates and the consequent cuts to home loan rates provides some stimulus. It is an open question as to whether households will spend or save the reductions in their borrowing costs.

The disconnect between Westfield’s experience and that of its tenants isn’t a new phenomenon. The appeal, and concentrated ownership, of the major retail centres has given the centre owners pricing power and they use it to raise rents year in and year out regardless of the external circumstances.

In the longer term that power might be undermined to some extent by the rise and rise of online shopping, which can only be made more competitive if the core of the cost base of bricks and mortar retailers (Australia retail centre rents are among the most expensive in the world) continues to be forced up.

In the near term, for every specialty retailer who quits a centre there is a queue of hopefuls wanting to enter it. Westfield’s Australasian centres are more than 99.5% leased. In the longer term, online retailing might be a viable alternative to the prospect of ever-rising rents.

This article originally appeared on Business Spectator.