The shopping centre industry has known nothing but perpetual growth since its emergence in the 1960s. New centres, expansion of centres, rising rental income and property valuations have all continued an upward trajectory through all economic weathers.
Centres prospered on the success of their tenants, although in turn, retailers certainly benefited from the contemporary design, tenancy mix, marketing and operational discipline that developed over time.
When local traditional retailers started to feel the pinch from e-commerce and weaker economic conditions and consumer spending trends, a surge of international entrants to the Australian market generally kept the good times rolling.
Cracks in the gloss of the shopping centre industry started to emerge in recent years before the pandemic hit. The faults were evident in an increased number of chain failures, sluggish sales across key categories, a flattening of demand from overseas retailers to the market and a slowdown in development projects.
However, 2020 is a major inflection point for the shopping centre industry, as retailers face their biggest ever challenge from the lockdowns and trading restrictions, volatile consumer confidence levels, uncertainty about ongoing government support programs and the rising tide of online shopping.
Most retail landlords have had to provide short-term relief on rent and charges to many of their tenants, with the likelihood that a large number of leases may need to be renegotiated. The trading hangover from the coronavirus pandemic expected to continue until at least 2022.
Landlords have already faced rental strikes from some retailers, including Premier Investments and the Sussan Group, but the real crunch for the shopping centre industry is what lies ahead, as banks and financiers stress test their clients and government support packages are scaled back.
Bumpy waters ahead
A recent survey by insolvency firm Jirsch Sutherland found more than half of 200 retail directors surveyed expected to explore restructuring options in the next six months.
The respondents indicated they would need to explore insolvency or restructuring solutions, and both of those options would inevitably involve store closures.
There is a growing concern among retail landlords about retailers using insolvency laws to exit leases, but they may well be unable to prevent an exodus of tenants that have refused better deals on occupancy costs.
Insolvency laws have always provided a mechanism for distressed businesses to exit underperforming stores as part of the process to either to cauterise losses or to restructure. But landlords now fear that retailers could resort to insolvency protection to cherry-pick locations they want to exit, even if those locations are viable.
Landlords have been spooked by several recent instances of retailers that have appointed administrators and, as part of that process, terminated leases.
The most recent is the Seafolly receivership, which saw L Catterton, an Asia-based private equity firm, regain control of the swimwear business. It was relieved of a large proportion of its debts and a number of unwanted store locations.
Previously, Scentre Group and, it is understood, other retail landlords, expressed concern about the Harris Scarfe administration. The entire retail industry was certainly surprised when Allegro Funds, the Sydney-based private equity firm, called in receivers just days after taking ownership of the department store chain.
It seemed incredible that Allegro Funds’ due diligence on the purchase of the chain from Greenlit Brands did not reveal the extent of its financial issues. The Harris Scarfe administration involved store closures ahead of a sale of the business by administrators to the owners of Spotlight and Anaconda.
There was also disquiet about the earlier administration involving franchise chain Sumo Salad, which was quite upfront in declaring it was using insolvency laws to address lease issues.
In a recent Federal Court ruling, it found that in some circumstances, rent incurred during a business’ administration period could be recognised as an ‘expense relevant incurred’ and payable as a priority in a subsequent liquidation. It will be interesting to see how this plays out as more retailers eventually enter voluntary administration in the future.
Jirsch Sutherland pointed out in a media release about the survey of retail executives that administrations were actually down in April and May due to support packages, including rent concessions, and protection of directors from liability during the pandemic.
That fall in administrator appointments may well be the calm before the storm but, in any event, landlord-tenant relationships are likely to be tested in the months ahead, even as businesses resume full trading.
This story appeared in the August 2020 issue of Inside Retail Magazine. To receive a print copy, click here.