Landlords to Pay Price for Retail Downturn

By Aldo Galante May 29, 2019

No doubt you are aware of the Vacant residential land tax that was introduced by the Victorian State Revenue Office in January last year on the basis it would help address the lack of housing supply in Victoria. This tax applies to homes in inner and middle Melbourne that were vacant for more than six months in the preceding calendar year. Thus far, there is little or no evidence that this has led to any change in the housing supply.

Now, following a recent meeting of states’ small business commissioners, there are calls for a vacancy tax to apply to Retail property.

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It is claimed Australia’s shopping strips and centres are being “crunched by sky high rents” and that landlords are incentivised to leave their shops vacant because banks allegedly base capital values on rental value. The idea that a shop is being kept empty because the landlord is using it as an asset is an emotional and uninformed response rather than a reasoned argument.

There are numerous factors at play here. Properties remain vacant for many reasons, a greedy landlord would probably be the rarest of them.

In our experience, many retail landlords comprise middle class families with one or two strategic investments. They are typically geared and need cash flow from the rental income to service their loans. When a vacancy is looming they seek advice from agents who are retail leasing experts, set their asking rentals at fair market levels and start advertising early in the hope of dove-tailing Leases. They are open to negotiation and incentives in order to secure a quality tenant.

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Property investors know a vacant property on the market for sale is typically less appealing than a fully fitted premises with a secure Lease to a successful retail tenant. Banks take the anticipated yield into account during valuations, but comparable sales and market rental evidence is equally taken into consideration. Therefore the argument that a vacant property is on an equal footing compared to one that is well leased does not stand up to scrutiny.  

Most people are aware that the retail market is tough these days. Many locations are hard to lease at any price. Asking rental is often not a major factor in vacancy. With the rise of online shopping and disruptive food delivery models, bricks and mortar retailers have to adjust their offering. Successful retail outlets are more than just stores now. Product education, entertainment and dining are now integrated as a wholistic retail experience. The customer experience has to be spot on to survive. Many traditional retailers have been slow to adapt and have subsequently had to shut up shop. The demand for shop fronts has therefore dropped.

We have also seen a shift in the make-up of our retail strips. Take Bridge Road, Richmond as an example. Formerly a thriving destination for bargain clothing hunters by the bus load, the GFC coupled with high rents and construction of suburban DFO’s saw a huge clean-out and vacancy rates soared. Today, with the construction of numerous high density apartment buildings in the immediate area, Bridge Road has been rejuvenated. The subsequent influx of residents has demanded a shift in local business offerings. Residents seek easy access to a range of dining choices, entertainment and services; which they cannot get online and don’t want to travel too far for.

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It is therefore difficult to draw a link between vacancies being primarily driven by landlords seeking to underpin property values. We suggest high vacancy is driven largely by other factors such as demand, profitability, competition, accessibility, consumer behaviour and the changing landscape of our retail strips and centres.

In our view any proposed retail vacancy tax would therefore be an unnecessary burden on investors and cumbersome to administer. More engagement with traders associations, councils, landlords and tenants is ultimately the solution.

For further reading, an article on this was published in “The Age” here: https://www.smh.com.au/business/small-business/vacancy-tax-calls-to-stop-landlords-from-keeping-shops-empty-20190516-p51o29.html

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Aldo Galante

Written by Aldo Galante

For over 30 years, Aldo has been at the forefront of Australia’s fast-evolving property industry. He served as President of the prestigious Australian Property Institute (Vic), providing determinations on rent-reviews and valuations

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