Retailers: Warning to landlords

Lower rents needed as retailers threaten to close stores

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Several retailers have issued more warnings to landlords to cut their rents or face massive store closures.

Chairman of Premier Investments (ASX: PMV), Solomon Lew says that some landlords were cutting rents by 20 and 40%, while others were still looking for 4 to 5% increases, despite shopping centre sales being down 3 or 4%.

Mr Lew has told the Australian Financial Review (AFR) that Landlords need to be more realistic, otherwise they’ll face vacancies, stating that the retail environment was still tough. Premier, which owns several retail brands including Just Jeans, Jay Jays, Smiggle, Dotti and Portmans, closed 14 loss-making stores in the six months to January 2013, and more closures could be on the cards.

Mr Lew’s comments follow those of David Jones’ (ASX: DJS) boss Paul Zahra, who earlier this week said that the company was reviewing the performance of six stores that were under-performing, in a clear warning to shopping centre owners. The issue for landlords is that David Jones’ stores are often anchor tenants, with large store spaces, and the closure of some of these stores could see, in a worst case scenario, the shopping centres forced to close.

Myer Holdings (ASX: MYR) boss Bernie Brookes recently said that the department store retailer wasn’t afraid to exit stores these days, something they wouldn’t have considered five or six years ago. Like David Jones, Myer stores are also usually anchor tenants.

With online and mobile sales growing, shopping centre owners will need to realise the threat to traditional bricks-and-mortar stores. Those most at risk include Westfield Retail Trust (ASX: WRT), Stockland (ASX: SGP) and GPT Group (ASX: GPT). Westfield has already reported that new rents are lower than previous leases, which is having an effect on income growth, expected to be between 1.5 and 2% in 2013.

Foolish takeaway

Investors in shopping centre owners face a period of low or negative growth in rents, which may extend beyond 2013, and pressure from other retailers for lower rents looks likely to spread.

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