Retailers: Warning to landlords

Lower rents needed as retailers threaten to close stores

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published March 22, 2013 10:15 am AEDT

Several retailers have issued more warnings to landlords to cut their rents or face massive store closures.

Chairman of Premier Investments (ASX: PMV), Solomon Lew says that some landlords were cutting rents by 20 and 40%, while others were still looking for 4 to 5% increases, despite shopping centre sales being down 3 or 4%.

Mr Lew has told the Australian Financial Review (AFR) that Landlords need to be more realistic, otherwise they'll face vacancies, stating that the retail environment was still tough. Premier, which owns several retail brands including Just Jeans, Jay Jays, Smiggle, Dotti and Portmans, closed 14 loss-making stores in the six months to January 2013, and more closures could be on the cards.

Mr Lew's comments follow those of David Jones' (ASX: DJS) boss Paul Zahra, who earlier this week said that the company was reviewing the performance of six stores that were under-performing, in a clear warning to shopping centre owners. The issue for landlords is that David Jones' stores are often anchor tenants, with large store spaces, and the closure of some of these stores could see, in a worst case scenario, the shopping centres forced to close.

Myer Holdings (ASX: MYR) boss Bernie Brookes recently said that the department store retailer wasn't afraid to exit stores these days, something they wouldn't have considered five or six years ago. Like David Jones, Myer stores are also usually anchor tenants.

With online and mobile sales growing, shopping centre owners will need to realise the threat to traditional bricks-and-mortar stores. Those most at risk include Westfield Retail Trust (ASX: WRT), Stockland (ASX: SGP) and GPT Group (ASX: GPT). Westfield has already reported that new rents are lower than previous leases, which is having an effect on income growth, expected to be between 1.5 and 2% in 2013.

Foolish takeaway

Investors in shopping centre owners face a period of low or negative growth in rents, which may extend beyond 2013, and pressure from other retailers for lower rents looks likely to spread.

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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns share in David Jones.

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