In order to keep a low vacancy rates in shopping centres around Australia, landlords such as Westfield Group (ASX: WDC), Federation Centres (ASX: FDC) (formerly Centro) and Stockland (ASX: SGP) have been forced to cut rent rates.
According to The Sydney Morning Herald, rents have fallen by an average of 0.5% for the 12 months to the end of March for specialty stores, whilst for some new leases, a reduction of as much as 5% could be made.
Harvey Norman (ASX: HVN), Myer (ASX: MYR) and David Jones (ASX: DJS) are amongst the specialty stores that have pressured landlords to lower their rent prices over the past 12 months, having threatened to reconsider signing new leases should the shopping centre giants not lower their rates.
Whilst these companies have begun to adapt to changing consumer trends and have largely recovered from their lows last year, they still remain vulnerable to the powers of online retailers and trading communities, such as eBay (Nasdaq: EBAY). As such, according to Tony Doherty – the head of retail, property and asset management at Jones Lang LaSalle – landlords and centre managers have become more realistic about leasing expectations.
"The importance of ensuring we have quality retailers is greater now than ever. Taking a high risk on retailers that are prepared to pay a higher rent is not always the best alternative."
Recognising the need to decrease rates for renting, many landlords are now trying to drive income growth in their shopping centres through expansion and refurbishment. For instance, Westfield Group and Westfield Retail Trust (ASX: WRT) are currently planning on expanding their Garden City shopping centre in Brisbane by an extra 40,000 square metres.
Foolish takeaway
Shares in many of Australia's retailers have recovered significantly since their lows last year, with Myer and David Jones increasing by a staggering 91% and 38% respectively since June. Whilst these companies are certainly not out of turbulent market conditions yet, a reduction in rent costs will greatly contribute to their profitability as they continue to adapt.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.
