months until the end of 2013. While base rent spreads on lease renewals in NSW were still positive, on average, during the period, Queensland and ACT were both slightly down (see chart). In NSW, where 174 lease renewals were examined, most deals still resulted in positive spreads, but those that went negative went really negative, hauling down the average. Simon Fonteyn, MD at LIS, commented: “It’s a mixed bag of results with pockets of the industry able to negotiate substantial reductions in their passing rents, in particular the larger chains”. Fonteyn also points out that upward pressure on rents in the food service category is beginning to emerge as new concepts come to market and strong concepts look to expand. Of concern to landlords is that the fashion, footwear, and accessories category that experienced a 3.8 per cent decline. This category is the foundation stone of most large shopping centres in Australia, accounting for more than 20 per cent of non-anchor space. It has not been easy for shopping centre operators to transition underperforming fashion space into something more productive that doesn’t look like a band aid. For this reason, any incremental sign of wonkiness among domestic fashion chains is a reminder to property owners – particularly owners of second tier centres – that they really need to have a convincing strategy for dealing with this issue. Two other key points emerge from the LIS data. First, tenants with negative lease renewal spreads are a mix of independents and chains, so it can’t be argued that the problem of sluggish rental growth is mainly a function of ailing mum and pops. Examples of chain retailers appearing in the LIS data with negative spreads at some centres are Noni B, Cue, Rockmans, and Bakers Delight. Second, the negative spreads are affecting some service tenants like hair salons, eyewear, and financial services. Together with food service, these are the categories upon which many centres have been relying to shore them up as they transition away from less productive general merchandise retailers. This may yet be sound in a big picture sense, but the space they occupy may have to be re-priced in some instances nonetheless. Where are we in the retail cycle? The LIS data raises a question that others have taken upon themselves to answer, namely, “Where are we in the retail cycle?” In its Q4 2013 Australia Retail Marketview, CBRE announced that retail was “moving off the bottom”. In a paean to Australian retail worthy of Voltaire’s Dr Pangloss, CBRE pointed to an array of positive factors supporting a recovery. But the topic of rent seemed to be an issue that CBRE exempted from its Best of All Possible Worlds. Negative re-leasing spreads “will continue, although ease through 2014”, said the authors. One of the factors behind the confidence of some industry professionals in the recovery is the influx of international retailers into the Australian market. This was the world view prevalent in the US immediately after the recession when European and Japanese fashion retailers descended out of nowhere to picnic on cheap American mall space. They have not stopped rolling out stores ever since. In Australia, the situation is vastly different, for while the globals could pump up rents in trophy retail space such as capital city CBDs and crème de la crème shopping centres, you have to be smoking something pretty strong to believe they will be more broadly beneficial to retail property values. The risks emanating from international retailers should not be underestimated. A material cut of domestic fashion specialty marketshare, a further evisceration of the standing of department stores and the elimination of marginal domestic fashion players are just the obvious ones. However, there is a less obvious issue that surprisingly few in the industry are talking about – not all of the global retailers are going to make it in the Australian market. Here, Australia can learn from the US experience, where international fashion retailers have encountered all kinds of issues with merchandising, real estate selection, pricing strategy, style, fit, and service. In baseball parlance, this will not be a home run for global retailers in Australia as some new entrants are already discovering to their displeasure. These teething problems will result in the exit of some global retailers and slow the advance of others, affording many operators of second and third tier centres more time to adjust. But for the moment, Simon Fonteyn of LIS thinks the encroachment of the global players is having a psychological impact on domestic retailers that is feeding the weak re-leasing spreads. “2014 will be a challenging year for domestic retailers and landlords because of unprecedented international competition,” he says. “The new entrants are creating uncertainty in the market and this is affecting tenant demand for space.”