Big super funds have an average allocation to the retailing industry, mainly through bricks-and-mortar property, of about 4 per cent, according to calculations by Adrian Benedict. While he didn’t actually say this, the sub-text from a presentation in Sydney last week was: get out now.
Benedict is the investment director, real estate, for Fidelity International, based in London. Fidelity is set to publish an important white paper on retail property investing this week. Using the UK as a guide, the outlook for Australian and New Zealand investors is not good.
If we follow the UK pattern, which we have clearly started to, unless you can see an opportunistic way to navigate the looming restructure of the whole retailing industry, the obvious conclusion is to ‘get out now’. Some retail stores will survive. Most will not.
Benedict says that the themes in retail property are global, but different markets have different dynamics. The UK, it seems, is well ahead of Australia in the ramifications of the two great disruptors for retail real estate: internet shopping and big global discounters.
Benedict says that retail – either through property or company ownership (with or without the property) – has been the best way to play the trends in aggregate consumption across the globe. Over the last decade, however, the contribution of consumption to overall economic growth has been falling. The fall has been coupled with the disruption in retail, he says.
For instance, in the UK the contribution to GDP growth had been about 75-80 per cent for a long time. Now, it’s under 50 per cent, and Australia is headed in the same direction.
“Retailers are questioning their models. They have seen a 10-20 per cent decline in profitability, from 15-16 per cent [of turnover] to 10-11 per cent. And that’s all happened in the p[ast two-three years,” he says. ”So, it becomes a game of survival.”
Benedict says that the “counterparty” in negotiations – the landlord – is no longer looking at a 5-10 per cent reduction in rent. Shop owners were asking for a 25-30 per cent reduction. “We’re seeing the retailers getting rent reductions and/or reducing their prices,” he says. “So, investors are re-pricing the cashflow because it’s becoming more risky.”
There also is, at the moment, a divide between “prime” and “secondary” retail real estate, he says. The “correction”, if that’s what it is, in prime is a fall of 20-40 per cent in rental income. But for the secondary – less prime – market, the fall is more like 40-70 per cent. “So, there’s a combination of falls in rental income and re-valuations,” Benedict says.
The good news is that the UK is a more extreme situation than in Australia. The bad news is that the trend appears to be global and will arrive here sometime pretty soon. The UK, for instance, he says, has had 10 years of austerity though the global financial crisis. Australia has not.
“At some point in Australia there will have to be a correction,” he says. Australia’s online retailing is currently about 9.8 per cent of the total. That is about half what it is in the UK. What used to be 2-3 per cent of consumption growth in the UK, is now more like 1 per cent.
Benedict calculates that Australia has a higher exposure to domestic retail than most other countries. Given that big super funds tend to have an exposure to property of about 10 per cent, most of that is domestic. Overseas property for super funds is in it infancy but growing. Of the 8 per cent left over, about half – 4 per cent – is in retail. The office market, on the other hand, tends to be more international.
But, in retail, not all segments are behaving the same. For instance, in food retailing, where customers have not as yet embraced the online model, the major disruption has come from the big global discounters, such as Aldo and CostCo. This is not so different from the 1980s, when smaller retailers failed because of the big shopping mall retailers.
Asked about what he advises his investors with retail property, Benedict responds: “When you’re the first [out], it’s not a panic.” That’s code for ‘get out now’.
– G.B.
