There is likely to be greater demand for retail space following increased retailer sentiment in Q2 and Q3 in 2003, returning to the high levels recorded during 2002. Retailer sentiment now shows a positive net balance* of 44% as at September, 2003, rising from negative 13% at the last survey in March, 2003, buoyed by the end of the war in Iraq, continued low interest rates, employment growth and manageable inflation levels.
The stronger economic conditions in Australia compared to global averages, as well as nine-year highs in consumer sentiment, have ensured that retailers are currently very optimistic about their future. While retail growth is moderate, it is still expected to be around 3% in 2003/4, which is in line with average long term growth of 3.5%.
Both consumers and retailers have benefited from the recent rise in the Australian dollar against other currencies, with the lower import prices helping keep sales volumes of imported goods strong.
The influence of major world events over the past two surveys is well illustrated by the impact war in Iraq has had on retailer sentiment. In the last survey nine out of ten retailers felt that they would be negatively affected by the war, but the strong rebound in sentiment has proven this to be a short term impact.
Further more, respondents are less polarized than last survey. There was a significant drop in pessimistic respondents (from 36% in March 2003 to just 6% in September 2003), and optimistic respondents more than doubled to 50% of respondents in September 2003 compared to 23% in March.
The positive outlook has led to increased interest by retailers to expand their business.
Most retailers remain committed to increasing their store numbers in both the short term (63% net balance) and medium term (90%), both of which are improvements over the last survey.
This improved sentiment will assist rental growth and reduce pressure on leasing incentives. This corresponds with our recent leasing evidence which has shown clear growth in the last few months of deals concluded. We are encouraging clients to take advantage of this positive sentiment and bring forward lease renewals. Occupancy costs, interest rates and the taxation system continue to be the three factors that have the potential to dampen sentiment over the coming year.
Occupancy costs, while still one of the agenda items for retailers, are less of an influence since the last survey on future trading prospects, subsiding from –71% in March 2003 to – 49% in September 2003.
Retailers continue to be highly sensitive to the possibility of interest rate increases and the potential negative impact an increase might have on spending.
However the negative consequences of a small increase in interest rates may well be balanced by the stronger Australian dollar and possible income tax cuts ahead of the next Federal election, which should stimulate retail sales.
According our the survey, regional centres continue to be the preferred location for retailers, with a positive net balance of 34%, followed by strip shopping centres and sub-regional centres, particularly if the centres are becoming more diverse in the services they offer.
According to retailers, the recent consolidation seen in the industry reduces the competition between shopping centre owners which may ultimately shift the balance of power towards owners. The fear is this may lead to a rise in occupancy costs for retailers and affect their profitability.
Some retailers have suggested that the ACCC should intervene if future consolidation occurs.
*David Snowbell is Director of Retail Research at Jones Lang LaSalle.
