Recent media headlines featuring announcements of retail store closure are not fake news. The conclusions people are drawing from them, however, tend to oversimplify reality.
Before addressing the nine questions underlying these closures, and their impact on AREITs, let’s first examine the data:
1. Why are these stores closing?
Competition is driving most of the closures. The entry of Zara, H&M, Uniqlo and other overseas “fast fashion” retailers, for example, has driven underperforming domestic retailers like Bardot, Jeanswest and, to a lesser extent, Harris Scarfe, out of business. Fashion has also been a factor in other recent closures, including Esprit and Marcs and the shrinking of Myer and David Jones.
What many forget is that retail has always been competitive. When a new entrant offers a better product range, lower prices or a more exciting retail concept, closures tend to follow. Inept or lazy management that fails to adapt might accelerate the decline, but history shows that retail chains come and go whether they do or don’t.
Change is constant. Long term, this is good for the consumer but for investors in the midst of the “adjustment period”, not so much.
2. What is the impact on the AREIT sector?
The table above shows the limited impact of recent closures on the AREIT sector, affecting just 0.47% of the net lettable area (NLA) of the AREITs concerned. While not immune from closures, AREIT portfolios tend to be of a higher quality, with capable management teams focused on limiting exposure to underperforming and weaker tenants. That shows up in the data.
3. Why are we seeing more closures now?
Store closures traditionally occur after the December trading period, which tends to be the most productive and profitable period for retailers. This is a well-established trend in Australia and internationally. As a general rule, if a retailer struggles in December the rest of the year will be far worse. That’s why many retailers close the doors in the post-Christmas period.
While the tough economic and retail environment saw store closures move higher in 2019 than in the past two years, they were in fact lower than 2016, which included the departure of Dick Smith. It’s important not to extrapolate one or two bad years into a trend.
