The bears are out in force again, this time
predicting the demise of bricks and mortar retail centres due largely to the
forecast impact of online retailer Amazon. How’s this for an example: “We think the magnitude of this short could
be bigger than subprime," says Stephen Ketchum, the head of Sound
Point Capital, a US hedge fund that manages more than $13bn in assets. That was
from a story
run in the AFR (17 July).
The US retail property market has been
affected both by overbuilding and the
accelerating impact of online. But to suggest the same impacts in Australia
might be taking things too far.
There’s one very telling difference between
ourselves and most US markets: overbuilding here is virtually impossible due to
the “blue dot” factor. What’s the blue dot? For decades, planning schemes have
enshrined restrictive land uses through rigid zoning laws. In the case of
retail centres, these extended to creating a legislated “retail hierarchy” of
centres with various overlaps of trade areas (based mostly but not exclusively
on centre size and nature of retail offer). The hierarchy, happily supported by
shopping centre owners and major retail tenants, had to be protected to avoid
overbuilding or encroachment of retail uses into residential areas (so the
official line went). This meant that prospects of developing a competing retail
centre within the trade area of an existing centre, were very limited if not
impossible.
This also led to the delicious irony of the
generally pro-free enterprise shopping centre and major retail industry
campaigning for more competition when it suited them (less restrictive trading
hours, for example) but opposing competition when it didn’t (objecting to any
new retail centres and frequently even objecting to tenancy changes or
extensions in competing centres). The anti-competitive nature of our retail
planning was wryly observed by retailer Gerry Harvey as posing a significant
barrier to entry for the likes of Amazon. According to Harvey, quoted
in Fairfax media: "Let's assume I buy a block of land tomorrow. I've
got to buy it, pay for it, put in a development application. If that happens
within three years, that's very quick… And I read that Amazon is going to be
fully operational in late 2018."
Amazon will need more than one major
distribution centre to service Australia. Finding the sites and getting the
approvals will not be as easy as it might in the US. Plus, we have a particular
tyranny of distance which any online retailer must confront when it comes to
delivery: as customers, we are more spread out than in major US population
centres.
The same hurdles faced the arrival of other
retail competitors like Aldi and Costco. Both faced difficulties in finding
enough sites to build a viable network – Aldi is getting there but Costco has a
way to go. Both faced legal and planning objections from those invested in
existing “blue dots” who did not want more blue dots on their trade area maps.
The downside of this has been that some parts
of Australia’s retail property sector are vulnerable to competition not mostly
because of online retailers like Amazon, but due to the lack of competition
which has encouraged a laziness towards the asset. Many centres (too many to
name) are little changed from their original design which could be 30 years old:
a big box containing a supermarket, supported with a mix of specialty stores
and a large on-grade (rarely shaded) car park. The enshrined lack of
competition, described as a virtue of the planning system, has shielded these
assets from the need to remain competitive and denied consumers access to a
higher quality retail offer in the process.
The opportunity to anticipate some fairly
obvious changes in consumer appetites and redesign these centres seems, to
date, to have been largely overlooked. Leading centres are ahead of the curve,
reinventing themselves as food, entertainment and community centres while other
retail centres languish. The leading centres that are getting prepared for the
future are typically held in institutional hands or in REIT structures so it’s
ironic that these are the funds being shorted. But the opportunities for the sector as a
whole are significant, irrespective of private or institutional ownership.
Health and social welfare will be the fastest growing industry by employment by
a country mile in coming decades. Education is not far behind. A suburbanizing
economy, enabled by advances in digital technology, means workplaces closer to
home will become much more feasible. The advent of driverless cars (probably
some time off) also has the potential to liberate a lot of on grade carparking
from occasional to more permanent use (for something else besides a carpark).
These and other factors present a host of mixed use offers that many shopping
centres are well suited for. Nestled in amongst established urban communities
with usually good transport connections, the opportunity is there to transition
the land use from a purely retail use to one that combines retail with office,
professional and medical suites, training and education facilities, health and
wellness centres, short term accommodation, retirement living, and community
uses.
But first, the planning system has to allow
it and centre owners need to want it. In the meantime, no doubt market analysts
who don’t appreciate the significance of our “blue dots” and our various other
barriers to entry will exaggerate the short term impact of Amazon, while the
real problem – outmoded design and strategy – poses greater long term risks (or opportunities
for those smart enough to identify them).
