Retail Slump Not Seen Since the GFC


NAB has declared the retail sector is “clearly” in recession after business conditions fell to six-year lows, adding to headwinds in Australia’s sluggish retail sector.

As deteriorating retail conditions hit the diversified portfolios of some of Australia’s largest listed companies, business conditions in the private sector continue to lose momentum.

NAB’s monthly business survey for May revealed that in seasonally adjusted terms, conditions in the sector are now around levels last seen in the GFC.

NAB chief economist Alan Oster said the survey’s results were sobering given that most responses were finalised post-election and post Philip Lowe’s signalling of cash rate cuts.

Oster said that while he didn’t want to overemphasise the figures, he said retail was “really, really doing it tough”.

“And it’s getting worse — a reading of -27 is so grim.”

The latest official retail trade figures also reflect the softening pattern in the sector, as do trends in household consumption data.

Household restraint is set to persist, with high household debt, low wage growth and falling house prices weighing in confidence in the sector.

“One of the messages we got out of the survey is that [unwillingness to spend] is a problem that will be with us for a while,” Oster said.

Stockland, Vicinity ‘exposed’ to retail slowdown: Moody’s

Credit ratings agency Moody’s vice president Maurice O’Connell said that weak discretionary spending and sluggish rental growth has added to the challenges the sector is already facing from e-commerce.

“Until recently, solid overall retail sales growth has partially insulated retail A-REITs from the challenges provided by online shopping,” O’Connell said.

“However, lower retail sales growth is now exposing retail REITs’ vulnerability to increasing online penetration.”

Landlords like Vicinity and Stockland are highly exposed to the sector, O’Connell noted.

E-commerce has grown at an average 14 per cent annually over the past five years and Moody’s expects online penetration to increase to 13-14 per cent by 2022 from around 10 per cent in 2018.

“The dollar value increase in online sales will soon exceed that of brick and mortar sales, with a possibility that the combination of slowing overall retail sales growth and increased online sales will actually tip brick and mortar sales into decline,” O’Connell said.

Related: Retail Headwinds Hit Vicinity Centres Bottom Line

Retail sector.
▲ Vicinity, which owns 50 per cent of Chadstone Shopping Centre (pictured), is highly exposed — taking a $202 million hit to its portfolio in the six months to June.

Retail landscape not all ‘doom and gloom’

As for “on the ground” market sentiment, Savills agents were quick to dismiss retail “naysayers” as failing to consider the full context.

“Despite the consistent doom and gloom commentary regarding the retail landscape, much of the negative bias needs to be taken with a grain of salt,” Savills’ director for retail investments Rick Silberman said.

“At the coalface, the demand for quality retail investment property is as strong as we can recall, as the fundamentals in most cases remain strong – land-rich assets and quality, reliable tenants with long, secure leases.”

“Every retail asset needs to be assessed on a case-by-case basis,” Silberman said.

Nonetheless, Australia’s major retail investors and REITs continue to lessen their exposure to the sector — pursuing operational improvements to retail assets and improving portfolio quality by offloading non-core retail assets.

Stockland divested $284.5 million retail assets over the last 12 months, as it shifts focus to non-discretionary retail and “remixes” its retail convenience offering.

Moody’s noted that Stockland, along with Vicinity, had large exposures to department stores, apparel and electronics — which are most at risk.

“Retail REITs with large discretionary exposures are the most exposed to the move to online shopping,” O’Connell said.

The insight into Stockland’s retail strategy was presented at its investor day in Melbourne on Wednesday.

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