How is Australia’s retail sector faring?

February 7, 2018 / By  

Investors have been actively acquiring retail assets in Australia, with transaction volumes reaching the second highest year on record in 2017. However, a number of retailer store closures, slowing retail sales growth and new sources of online competition resulted in some softening of investor confidence, and not just in the direct property market.

The softer sentiment on Australian retail throughout 2017 was reflected in equity markets as well, with the high volume of short positions in retail company stocks on the ASX S&P 200.

‘Consumer Discretionary’ companies – which includes household durable goods, apparel, entertainment and leisure, and automobiles  – recorded the highest average proportion of total stock in short positions (4.8 per cent) during the 2017 trading period of any sector, compared with the ASX S&P 200 average of 3.1 per cent  (ASIC). Myer was the most shorted stock in the ‘Consumer Discretionary’ sector (14.1 per cent) over 2017.  Retail Food Group, JB-Hi Fi Limited and Harvey Norman all had a high proportion of short-selling (>8 per cent).

Despite the high level of short positions in the ‘Consumer Discretionary’ sector reflecting an expectation of a decline in share prices, the ‘Consumer Discretionary’ index grew by 8.7 per cent over 2017 and outperformed the overall S&P ASX 200 by 2.9 percentage points, consistent with the global trend.

Figure 1 – Average % of total shares held as short positions – 2017

Source: ASIC, JLL Research

The challenges faced by many Australian retailers are well-documented and captured media attention over 2017. The threat from e-commerce negatively impacted retailers and landlords with some retailers revising down sales growth expectations.

In addition, some retailers fell into voluntary administration while others engaged in store rationalisation strategies to improve profitability, adding to the growing uncertainty in the Australian retail sector.

In 2017, we tracked ten major retailers that fell into voluntary administration, leaving 295 stores to potentially close. As at January 2018, 100 of these stores had been closed, in addition to the 757 stores that closed in 2016 due to retailers that had fallen into voluntary administration.

Store closures were concentrated in the apparel segment in 2017, accounting for seven of the ten retailers that fell into voluntary administration. The apparel sector was also impacted by a number of high profile retailers announcing significant store rationalisation plans.

Some retailers included Diana Ferrari, Myer and Specialty Fashion Group, which announced plans to close approximately 300 stores from its 1,016 store network as at September 2017.

However there’s need to put this in context. Of the stores which closed in 2016 and 2017 due to administrations (857 in total), they represent only 1.0 per cent of Australia’s total retail store count.  

Occupancy rates in Australian shopping centres have remained firm. JLL’s most recent December 2017 retail vacancy survey showed the average vacancy rate actually declined to 3.6 per cent from 4.0 per cent in June 2017. Nevertheless, some secondary centres are being affected by long-term vacancies, and divergence continues to be a strong theme in the retail sectors as some tenants consolidate their store network.

How will Australian retail fare in 2018?

We believe the competitive retail landscape will challenge some retailer business models with the potential for more store closures in 2018. However, a number of strong retailers are continuing to expand their store networks.

Shopping centre owners will need to adopt a proactive approach to customer engagement, understand retailer business models and ensure the appropriate tenancy mix to reduce the potential exposure to weaker performing sub-sectors of the retailer landscape.

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