"Retail property faces its greatest challenges in decades - barring the immediate post-GFC period," says Maria Lee, Senior Project Manager at BIS Shrapnel and author of the Retail Property Market Property Forecasts and Strategies 2013 to 2023 Report.
"There are a number of factors at play," says Lee. "Firstly, aggregate retail turnover growth is likely to be modest over the next decade, as we are lacking two key drivers to growth - an economic boom and/or (marked) falls in the savings ratio.
"We are also facing changing spending patterns away from retail goods and services, partly - but not wholly - linked to the ageing of the population. On top of that, retail turnover to individual shopping centres will be diluted by strong levels of retail building - a new peak in commencements is expected in 2013-14."
Potentially dwarfing these issues are two other trends, according to the report:
. The continued growth of online retailing; and
. A substantial depreciation in the Australian dollar.
The report estimates that the market share of Internet retailing could likely increase from six per cent at present to 11 per cent within five years.
"What this means is that more than $3 out of every $10 of additional expenditure will go online," says Lee. "Put another way, the turnover growth through shopping centres would be a full one percentage point higher without the growth of online shopping. That's highly significant."
Online retailing has a two-pronged impact. There's the obvious effect of taking market share from "traditional" bricks-and-mortar retailing. But there is also an impact on retailer profit margins from consumers using price comparison websites or apps on their mobile phones when in-store - and then demanding a price-match in order for them to buy there and then.
On the other issue of the Australian dollar, BIS Shrapnel believes that shopping centre incomes will come under pressure as a result. While there may be a boost to retail turnover from a lower dollar - because of less expenditure leakage overseas (both online and in-store when holidaying overseas) and more spending by overseas visitors in Australia - that will likely be well and truly offset by a negative impact on retailer profit margins.
BIS Shrapnel has calculated the impact of a substantial devaluation on retailer profitability and, hence, capacity to pay rent.
"Based on our forecasts of a 23 per cent depreciation against the Trade Weighted Index, we estimate that a retailer which imports 50 percent of product sold will see its profitability fall to zero if it is to continue to pay current rents," says Lee. "Clearly, this is not sustainable. This will impact their ability to pay rent, and vacancies could also be expected to rise."
Taking all factors into account, BIS Shrapnel forecasts centre incomes to grow at an average pace of just two per cent per annum over the next five years - failing to keep pace with CPI inflation.
Retailers and shopping centre owners are going to have to work harder than ever to remain relevant and sustain growth.