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Outlook grim for owners of shopping malls, even grimmer for mum and dad investors with small suburban retail premises

Outlook grim for owners of shopping malls, even grimmer for mum and dad investors with small suburban retail premises

Rents at major shopping malls are being slashed by about 50% during the lockdown, according to a survey by the New Zealand Council of Retail Property.

The Council mainly represents larger corporate property investors and managers with substantial retail assets such as shopping malls and big box retail centres and between them, the Council's members have around 5000 tenants.

The survey found that about three quarters of those tenants had been offered some sort of rent relief by their landlords, which included either rent reductions or deferrals or a combination of both.

Where the changes had been agreed between the tenant and the landlord, it usually meant the tenant was paying around half the normal rent.

Some tenants had been paying nothing in the meantime.

Some of the 25% of tenants that had not been offered rental assistance were large corporates themselves or were deemed essential services and had traded through the lockdown.

"In general, where rental reductions have been agreed, the figure negotiated generally sits at around 50% of monthly rental, the Council's chairman Campbell Barbour said.

"This has taken the form of deferrals or abatements or a combination of both.

"We are also aware that arrangements have included other changes to contracts around matters such as rental reviews and lease term extensions," he said.

The survey paints a fairly downbeat outlook for retail property investors and the situation is likely to be even worse for smaller investors with retail properties.

Retail premises, often located in suburban shopping strips, have been popular with so-called mum and dad investors in recent years and they have often sold at sub-5% yields.

But this is also the sector that is probably most at risk from the effects of the lockdown followed by a recession.

A large shopping mall will nearly always be able to attract a new tenant to fill a vacant space provided the owner is realistic on rent and other terms.

However many of the businesses in the suburban strips are more marginal, and vacancy periods are likely to be longer.

That could create extreme financial difficulties for some landlords, especially those that are carrying relatively high levels of debt.

This is likely to lead to a substantial downward resetting of rents and capital values for all retail premises and a necessary adjustment of debt levels.

Many landlords and tenants simply will not make it through that process and even those that do are facing a hard slog.

Even those landlords with rock solid tenants on gold plated leases won't escape the carnage.

Eventually all leases come up for renewal and when they do, they are likely to be on significantly less favourable terms, so eventually there's no escaping from a market-led reduction in rental income and capital values.

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33 Comments

Some shopping malls have been having a tough time prior to recent events. Best to keep as many tenants as possible right now.

Or is it: hey members, the government wants to know what we are doing to help our tenants. They may even decide to regulate if we aren’t doing enough. Please ‘honestly’ fill out this survey for us.

22
up

I had to have a chuckle at the spot on TV last night about the huge number of shops that are now for lease ( 22!) down Davenport Road in Tauranga. "Look what Covid19 has done!" was the theme of the piece. But....it was like that BEFORE the virus hit. Whatever new listings have been added to the already soaked commercial rental offerings that were there before, will make no difference. The 'High Street' is dead, and I doubt anything will bring it back. Now....as for the shopping centres vacancies that are going to arrive en mass, the disaster is just getting going!

12
up

Indeed. I saw the same thing. Blaming that poor virus for the mismanagement of TCC.

I don't see how it is entirely the council's fault. We have the same issue in New Plymouth. The most likely thing in a shop front on the main street is a "Lease" sign.

The decline in economic activity in New Plymouth over the past 2 years can be placed squarely at the foot on Ms Ardern when she announced the BAN ON OIL and GAS .

New Plymouth is just another rural backwater without a future oil and gas industry

It started before that. I arrived in 2008. Dairy was on the up, Kupe had just started producing. NP was at it's peak.

Dairy then got severely wounded, and while limping along is by no means recovering.
O&G hasn't had a big strike since Kupe, so has just been ticking over.
Chch and Kaikoura earthquake then opened up a world of "eathquake strengthing" issues.

Tourism was minimal, no universities, no military bases, a tiny port, and no Govt depts.
It has more white elephants per capita than anywhere else in NZ that seemingly inhale our rates money.
- A bust up stadium
- A truly, outstandingly, hopeless "Gallery" for a Christchurch born artist that spent the vast bulk of his life in the states, and never once even visited NP.
- A new airport designed for the forecast increase in passengers. cough...cough....
- A race course leased from the council for a token amount on perhaps the most prime realestate in the whole city.

Jacinda's Ban was the final nail in the coffin.

Covid appears to be the hearse pulling up to take us all away.

As a fellow New Plymouthonian. The stadium, a regional council shenanigan, with NPDC lamely acquiescing together with the new airport which I understand was voted on without a cost benefit analysis, would typify councilor expertise and not just in NP. One of the councillors muttering about the stadium was Gordon Brown a journalist in his former life before become a professional politician . Difficult to ascertain whether this is an eye to being re-elected.
I wonder if the contracts for the stadium and airport cannot be exited without too much pain.

I would have thought letting all the big box retail head out to Bell Block - with more on the way at the old fertilizer works - was what sucked the life out of city central.

Do a survey of the total sq m of retail 20, 10 and 5 years ago. Adjust for population change. Be interesting to see the result. Could probably be worked out from historical district plan zone documents.wonder if it would just see a shift.

You are right, retail is moving towards Bell Block. While hospo is moving towards the clock tower. Although I can't see the fertilizer works ever converting into retail/hospo. Too much asbetos and chemicals spread across the site.

Retail space has definitely increased - even in my time here. But mostly in the form of Supermarkets.

Bollocks. Look at Karratha in WA.
House prices were selling for over a mill for dungas during the gas boom around 2012. Now the same house will be listed at 200k and JA hadn't been near the place.
The mall is still busy but any high st shop belongs in a Ry Cooder video.

Retail strip leasing has been tough for 15 years.
Takapuna , golden mile , heaps empty, dont mention rotavegus

Tauranga has been like that since the double whammy of the GFC and the PSA outbreak wiped out both the property sector and kiwifruit sector. I was living in the region at the time and couldn't believe how adversely it affected the town. Admitedly there has been some huge retail builds added in the recent bouyant phase as the region dug itself out of the recessionary hole it landed in post those two events and its not hard to see that sort of tenancy option makes a crumby and expensive lease in the Tauranga or Mt Maunganui shopping precinct simply unattractive. I think its going to be very difficult in the BOP for the next few years...

Digital Finance Analytics covered Tauranga last September in their post ‘The Ghost Town’
https://youtu.be/NnW9uxGRyAY
Nothing to do with Covid 19.

But I was told commercial leasing was the future?

Thats what Colliers wanted you to believe

"Thats what Colliers wanted you to believe"

Many believed it, and bought commercial property using high leverage.

1) https://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=120...
2) https://www.stuff.co.nz/business/115181374/residential-property-investor...

Been there done that, got the t shirt and passed the test. Friends couldn't understand why we would need a property manager for commercial. Some retailers are very good but an experienced PM makes all the difference for the niggly awkward ones

And Olly Newland.

10
up

Agreed. Foot traffic must be all but nil. Heard stories of malls in Tauranga where smaller owners moved out and liquidated themselves (to defeat mall owner) when L4 was announced. Re purpose garage, new website and courier and your away again.

The move to online has been well underway for some time. Anyone who does not have that as part of the tool bag will really struggle going forward, perhaps terminal. Online businesses - just need a warehouse and small office in the burbs/fringe.

Or do a deal with suppliers and drop-ship to customers - no warehouse needed....

clothes and shoes will always need shops , where else will you go to try them on to get the correct size to order online.

Or read the tags on the shoes and jeans and get another of the same brand and sizing....unless one has Expanded during lockdown, with all that Home Baking....

In the longer term i think we'll see a decline in rents paid across sectors.

Councils are going to have to take a Rates haircut

If they can take their heads out of their ar*es for a look around they might agree with you.

I wish

"Rents.. being slashed by about 50% during the lockdown"

Fair enough totally though there should be assistance given, when the shop lies idle and generating nothing. Another article today said that under L2 GDP will be 93 percent... which should mean commercial landlords get most of their rent at least.
I am not pumping for commercial landlords, but I am wishing to see widespread recovery for all. Sooner not later

I wouldn't want any of those dodgy liquor stores that exploit Indian students as a tenant, their 'staff' have all disappeared back overseas and will have a hard time recruiting locals...

Announced Today

Smiths City (NZX.SCY) today announces it is starting consultation with its employees and negotiations with its landlords to restructure the company.
The Covid-19 pandemic and the temporary closure of our store network since late March continues to have a significant impact on our business.
Smiths City online has continued to trade, and while we are pleased with the support we have received through the lockdown, this has obviously not been enough to make up the shortfall in sales from the closed stores. Moreover, once we open our doors – potentially as soon as we move to Alert Level 2 – we anticipate facing subdued trading conditions.
Smiths City is continuing discussions with potential strategic investors, as foreshadowed by its announcement to the NZX on 30 March 2020. The company continues to retain the support of its bank ASB to see these discussions through to conclusion.
From the analysis the company has undertaken, a restructuring is clearly necessary in order to secure investment and have a sustainable, post-pandemic retail business. The Board has therefore proactively commenced this restructuring process as its investor discussions continue.
Smith City Chair Alastair Kerr said while it was likely that the restructure will result in the closure of some stores and job losses, the final outcome is dependent on how the consultation and negotiation process unfolds.
“We expect this consultation process to be concluded in just over two weeks with the Board to then make a decision on adopting a final restructuring plan,” Mr Kerr said.
“The decision today to start this process has been hard. Smiths City has long benefited from the support of a loyal customer base as well as a committed team that has frequently gone the extra mile to meet customer demands and support the Smiths City brand.
“Through the lockdown this has also included a reduction in pay. We are grateful for the sacrifices the whole team has made and we regret having to take further action to ensure the future for the business.”
Smiths City will update the market as more information comes to hand.
For more information:
Richard Inder

DownTown Tauranga is (& was before covid) Dead Town Tauranga. The council are absolutely hopeless at most things including running DT Tauranga. I didn't think we did too bad re the kiwifruits PSA issues. At least we recovered well with the new gold fruit, a better fruit all round. The GFC took its toll for sure, especially on retail, but that story is no different to many. It was the local greedy landlords club which basically controlled the central city for many years that finally killed it. The high rents for the old & very poor facilities they offered soon became blindingly obvious. That & three dysfunctional councils. Bang. Your dead.

Its Tauranga City Council not covid that has ruined the CBD...Mayor Crosby and his preference for building an enormous bowling club for the retired millionaires over at Mount Maunganui while the sewerage system was collapsing due to lack of R&M...and overseeing the over the top levels of parking enforcement that drove the shoppers out of the cbd to the malls at Bayfair and Bethleham. TCC...not a smart lot at all!

Well done for those landlords, we all should lend a hand during these times.

Days to the General Election: 23
See Party Policies here. Party Lists here.