I would urge you all to join me in a drink to salute the Australian Taxation Office (ATO), a government department that does not generate much affection from the populace. Nonetheless, the ATO deserves praise and gratitude or, perhaps simply relief, for propping up the retail property market in main street shopping centres. Like the boy whose finger in the dyke kept a flood at bay, the tax collector has prevented a torrent of financial woes for the owners of small shops, courtesy of tax deductio
tions that have cushioned optimistic valuations in the current economic circumstances.
The problem of valuation
Just as major retail landlords have seen their valuations fall or flatten for some of their shopping centres as achievable rents from tenants decline, strip centre property owners are facing the same challenge.
For owners who have no mortgage or a low debt against the property, the valuation problem is less pressing, and flexibility in lease terms and rents is available to retain a tenant. However, owners that are negative geared with high debt levels are in danger of having banks call for more security if the rents they can achieve don’t tally with property valuations.
The finance issue is one of the factors in an increasing number of empty shops in suburban strip centres, including some of the most popular and historically successful strips.
The fact is, for some owners, it is better to leave a shop vacant and retain a notional but probably non-achievable rent than to test their banks by offering a tenant a lower rent that doesn’t justify the valuation relied on for loan facilities.
As long as the ATO allows full-cost deductions for the vacant space – even where it is not realistically being offered at a fair current market rent – the store owner is able to stave off a potential financial crisis. Although, another cost is potentially looming for strip centre shop owners with calls for a state government-imposed levy on those landlords who do not cut their rents and leave shops vacant.
The finance issue is, of course, not the only reason why many shopping strips have a string of vacant premises. The challenging retail trading conditions have taken their toll and arguably have been more detrimental to independent retailers in shopping strips. Online shopping is also an apparent factor.
Skateboarders not shoppers
However, the problem in many strips, especially inner urban strips, has been the elimination of parking or reduction in hours for on-street parking to provide clearways for commuter traffic.
Then, of course, there are the beautification works by local governments that create obstacle courses for shoppers and barriers to shops but great skateboard circuits for teenagers!
In Melbourne, the creation of super tram stops and the surrender of vehicle lanes for bicycle lanes have increased congestion and made visits to local strip centres an epic battle.
Shoppers often have little appetite for that battle with the increasingly depleted mix of active retail shops, a problem that the mooted vacancy levy would not resolve.
In many strips, the butcher, the greengrocer, homewares and convenience hardware stores have given way to coffee shops, restaurants and cafes, tattooists and dubious massage outlets.
Only the hardiest of apparel and footwear stores have any presence in most suburban strips today, while the banks are in retreat, leaving a pharmacy, newsagent, hairdresser and maybe a florist or two-dollar shop to keep plugging on.
With the exceptions of the coffee shops, most of these other businesses generate relatively little foot traffic during retail trading hours and, just like vacant shops, break up the active retail frontage of the centres.
Falling footfall, higher costs
Added to the less dynamic and vibrant business mix are spiralling land tax costs, which are inevitably part of the rental calculation, while retailers are wedged between falling footfall and higher and often unsustainable occupancy costs for their premises.
The future of strip shopping centres is shaping as curtained offices, medical services, op shops, community agencies and massage, along with cafes and restaurants.
Sadly, there’s also the loss of incubator space for new retail concepts and convenient environmentally friendly local shopping in a store where the retailer actually knows your name.