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How do retail businesses survive when the rent is so high?

By 16 May 2011 30

old dick smith

Has anyone got any experience with owning any retail businesses in Canberra?

I’ve just been curious because I’ve been seeing a lot of vacancies all over Civic and Tuggeranong. So I looked up one of the ones up for lease, and I can’t believe how expensive they are!

For example, the old Dick Smith place is going for $227,000 an annum!
(http://www.rhcommercial.com.au/properties/71085)

That is more than $4000 a week. There is a business selling sports jersey’s there at the moment (not sure if it’s permanent). Say an average sports jersey is about $50, that means they need to have 80 sales in one week just to cover the rent!

And this isn’t taking into account additional costs such as cost of staff wages, utilities, the cost of inventory etc. Even if they could mark up their product by 50%, it would at minimum double that cost to $8000 right there.

Granted I don’t loiter around malls all day long so I can’t say for sure how much they sell, but to me, that just doesn’t seem to add up.

It would surely explain why there are so many vacancies right now, but I can’t even see how most of the existing businesses could even survive given that they need to pull $8000 a week in revenue?

Is it the case that with business leases, it’s the type of thing where no one ever pays the actual asking price? Like nobody would pay $227,000 a year, it’s just the price they have advertised but when you go in, they’ll tell you they have a special offer and are willing to lease at a lower price?

Have I done my Maths right? Is my estimate about how much revenue they get inaccurate? Is there something I’m totally missing?

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30 Responses to
How do retail businesses survive when the rent is so high?
dungfungus 1:09 pm
16 May 11
#1

The only thing you have missed is a review of your investment/superannuation portfolio. If you have any shares in listed property companies who own shopping centres, sell them ASAP. For that matter, sell all your shares and invest in bank term deposits and transfer your super to cash only.
Small business in Australia is doomed thanks to the ACCC (whose CEO is a major stakeholder in a large shopping centre) allowing big business to dominate and now the new Labor FairWork regulations being enforced by the various trade unions. If you are committed to starting a small business make sure you don’t sell anything that that Colesworths sell. Best to go online which is less risky that paying $4,000 per week and dealing with unions and other parasitic bureaucrats.

aidan 1:30 pm
16 May 11
#2

A theory (feel free to shoot it down in flames):

The value of a commercial property is determined by the return on the investment, i.e. the rent. If they drop the rent the value of the property is diminished. If the landlord owns multiple commercial properties this will also affect their value, as the general levels of rents fall. They are better off claiming an operating tax loss than losing the capital value of their properties.

emd 1:30 pm
16 May 11
#3

I used to have a little retail shop in Canberra, it closed at Christmas after almost two years trading. Basically, if you’re a retailer, you need to be in a mall in Canberra, and the rent and conditions make it very hard for startup independent retailers. Cold weather means nobody goes street shopping in winter, but rents are too high to make it work when retailers are reliant on summer sales getting them through winter.

The small independent retailers still in business here include many who signed their lease, or bought their space, at more affordable prices years ago. I’ve noticed quite a few businesses moving out to the suburbs or becoming home-based or closing down as their lease is due for renewal at current market rates. There are a few exceptions, as with any generalisation.

The problem here is that property prices are not far off Sydney levels, but we don’t have the same number of shoppers to provide the turnover to pay the rent/mortgage. I guess it will level out over time, but in the meantime Canberra misses out on more small startups to provide a change from the national chains in the malls.

Pommy bastard 1:53 pm
16 May 11
#4

Pommy bastard said :

For example, the old Dick Smith place is going for $227,000 an annum!

“An annum”, love it! :-)

Jivrashia 1:57 pm
16 May 11
#5

I don’t know enough about the property market but if numerous the vacancy of shop fronts around Civic is anything to go by then someone hasn’t got their maths right.

The rent/property value should be proportional to how much revenue an average shop can pull in. If it is disproportionate then it means that the property value assessment is unrealistically high. As opposed to residential properties, where it is based on how much people are willing to pay, a commercial property should be assessed on how much a business (retail in this case) can afford.

(I say willing to pay instead of affordability as many people purchase a home valued beyond their means to pay)

As for the new sports jersey establishment that took up the previous DSE corner in the bus interchange, I have to admit I am dumbstruck. For those who may not be familiar with Civic, there is another sports jersey shop nearby that is permanently having a 1/2 price sale and, IIRC, doesn’t always seem to be crowded with shoppers. Perhaps this new sports jersey shop is there for the winter season only, in the same way that there was a ski shop at the corner of Northbourne Ave and Cooyong St (not there this winter?).

amarooresident3 2:42 pm
16 May 11
#6

I’m convinced that some retail establishments are fronts for other “businesses”. It’s the only explanation for their continued existence despite the lack of obvious customers.

shadow boxer 3:04 pm
16 May 11
#7

$50 for a sports jersey might be where your maths is going wrong. Try $150-200

I think you will find the new one (Jerseys) is the real deal selling actual replica jerseys and associated merchandise rather than knock offs and last years.

arescarti42 3:17 pm
16 May 11
#8

aidan said :

A theory (feel free to shoot it down in flames):

The value of a commercial property is determined by the return on the investment, i.e. the rent. If they drop the rent the value of the property is diminished. If the landlord owns multiple commercial properties this will also affect their value, as the general levels of rents fall. They are better off claiming an operating tax loss than losing the capital value of their properties.

It’s an interesting theory, just a couple of points though.

I suspect that people who invest in commercial property are more likely to be looking at the rental returns, rather than purely capital gains which is what the majority of people in residential property are after.

The other thing is you can hardly base your capital value on a rental figure that you can’t actually get in the market place. It’s like saying “my house is worth $1.2 million”, it’s just a paper figure. If you advertise it at $1.2 million and no one is interested, then it isn’t worth $1.2 million.

The other thing you have to remember is the old Dick Smith has to be one of the best retail locations in Canberra. I’m sure you’d find rents are far more reasonable in places like Fyshwick or local shopping centres.

It’d be interesting to get some perspective from someone who actually does invest in commercial real estate though.

Reprobate 3:20 pm
16 May 11
#9

amarooresident3 said :

I’m convinced that some retail establishments are fronts for other “businesses”. It’s the only explanation for their continued existence despite the lack of obvious customers.

I started to think that about the old Stereo Warehouse in Fyshwick, after 3 changes of location even as late as the early 2000′s they had some stock on their shelves (especially a couple of TVs and VCRs) that quite literally had been there since I first got into HiFi stuff in the mid-80′s… gone now, but the mystery still lingers…

junketFunket 3:21 pm
16 May 11
#10

amarooresident3 said :

I’m convinced that some retail establishments are fronts for other “businesses”. It’s the only explanation for their continued existence despite the lack of obvious customers.

Has anyone ever seen that Upmarket Furniture place up in Tuggeranong? Right near Good guys and Go-Lo? I swear, that’s got to be a front for something. I worked in Tuggers for two years and it was right outside where we grabbed coffee, and I have never seen anyone even in there.

And then just last year, they re-located and set up a NEW store right inside Hyperdome, which is twice as big and probably twice as expensive. Still never saw anyone go in.

Gungahlin Al 3:36 pm
16 May 11
#11

aidan said :

A theory (feel free to shoot it down in flames)

Or hypothesis rather…

OT, we toyed (oh so briefly) with the idea of setting up a decent gym in that long-empty building at the corner of Sandford and Flemington in Mitchell. Ideal site. But they want an outrageous amount for rent.

And that would be why it’s still empty I guess.

amaroovian 3:45 pm
16 May 11
#12

Jivrashia said :

As for the new sports jersey establishment that took up the previous DSE corner in the bus interchange, I have to admit I am dumbstruck. For those who may not be familiar with Civic, there is another sports jersey shop nearby that is permanently having a 1/2 price sale and, IIRC, doesn’t always seem to be crowded with shoppers. Perhaps this new sports jersey shop is there for the winter season only, in the same way that there was a ski shop at the corner of Northbourne Ave and Cooyong St (not there this winter?).

I think you will find this is the Jerseys store that was in Brand Depot, and that it is a temporary location until they find a new home (I have heard it will most likely be in Fyshwick in the DFO). I imagine the increased traffic and trade will most likely make up for the increased rent because we all know Brand Depot wasn’t swarming with customers at any point in its (short) history.

junketFunket 3:46 pm
16 May 11
#13

aidan said :

A theory (feel free to shoot it down in flames):

The value of a commercial property is determined by the return on the investment, i.e. the rent. If they drop the rent the value of the property is diminished. If the landlord owns multiple commercial properties this will also affect their value, as the general levels of rents fall. They are better off claiming an operating tax loss than losing the capital value of their properties.

I thought about that. And I hear the same thing is happening on the Chinese property market. 1000s of buildings being built, no one actually in them, cause if they actually rented it out, it would lower their capital value.

But unless they’re trying to flip them as quickly as they can, like the Chinese are doing, isn’t it just an exercise in denial? A rented property is going to be worth more than a vacant one.

pete09 3:47 pm
16 May 11
#14

I guess it shows how few people shopped at Brand Depot, everyones referring to the Jerseys megastore that opened up in the old DSE store as a new shop. Jersey’s was at Brand Depot for almost the entire time it was open, and was the busiest store there aside from Paul’s Warehouse. Before that it was open at Cooleman Court in Western Creek.

beejay76 4:10 pm
16 May 11
#15

arescarti42 said :

I’m sure you’d find rents are far more reasonable in places like Fyshwick or local shopping centres.

You’d think so, wouldn’t you? I’ve often wondered if that’s true here in Gungahlin. There’s a ridiculously high shop turnover on Hibberson Street. Sure, Gunners will be fab an’ all, once they’ve finished it. But for now it’s all bread and milk. I suspect, however, that retailers are paying rents like it’s 2020 and shoppers a go-go.

dungfungus 4:15 pm
16 May 11
#16

johnboy 4:18 pm
16 May 11
#17

I did love how MFarr called “analysis” what most of us would call “reading”.

dvaey 4:20 pm
16 May 11
#18

arescarti42 said :

The other thing you have to remember is the old Dick Smith has to be one of the best retail locations in Canberra. I’m sure you’d find rents are far more reasonable in places like Fyshwick or local shopping centres.

A large charity that opened an op-shop in Phillip a couple of years ago, is paying more than the quoted figure for the old Dick Smith site. Id say the retail space is approximately the same, the only difference being the greed of the owners/developers.

georgesgenitals 4:21 pm
16 May 11
#19

I wouldn’t assume the short term tenant in there is necessarily paying the asking price. If I was looking for a long term customer for a commercial premises like that I’d quite happily discount to get someone in short term.

aidan 4:23 pm
16 May 11
#20

junketFunket said :

aidan said :

They are better off claiming an operating tax loss than losing the capital value of their properties.

But unless they’re trying to flip them as quickly as they can, like the Chinese are doing, isn’t it just an exercise in denial? A rented property is going to be worth more than a vacant one.

If they have a stonking great mortgage on the place, at a certain valuation, and the rents all subside, the place is worth less, they are underwater. Nasty.

For my theory to hold water it is also necessary that these landlords own many properties, so there is an imperative to keep all the level of rents high so as not to devalue their other assets.

arescarti42 said :

The other thing is you can hardly base your capital value on a rental figure that you can’t actually get in the market place. It’s like saying “my house is worth $1.2 million”, it’s just a paper figure. If you advertise it at $1.2 million and no one is interested, then it isn’t worth $1.2 million.

I know what you’re saying. How can I put this nicely … valuers seem to value properties on their value, which they determine by looking at the value of other properties, owned by the people who own the property they are valuing. Yeah?

It isn’t a problem until they actually try and sell the building, or maybe refinance. Maybe a bank would look at occupancy rates and rate of return, maybe not. Probably they look a little harder if times are bad, and not at all if times are good.

Anecdotally it seems many commercial landlords are not willing to cut rents to let their places. I’m just trying to figure out what their financial motivations are, because cash flow doesn’t seem to be high on the list.

EvanJames 4:40 pm
16 May 11
#21

You see it everywhere, premises vacant for months, even years. You can sell anything if the price is right, and if the price is wrong, it won’t sell. Wouldn’t it make sense to lower the rent until it sold? The owners are paying rates and stuff on the vacant premises, and there’s no money coming in. It just doesn’t make sense.

I’d rather shop at a normal place rather than a mall, I love Manuka for that reason, and avoid Canberra Centre like the plague. I’m still annoyed that so many good Fyshwick shops moved into DFO.

EvanJames 4:42 pm
16 May 11
#22

johnboy said :

I did love how MFarr called “analysis” what most of us would call “reading”.

He never misses the opportunity to become slightly more important than he was.

KaptnKaos 4:45 pm
16 May 11
#23

dvaey said :

Id say the retail space is approximately the same, the only difference being the greed of the owners/developers.

Ch Ching – hit the nail on the head – greed of the centre management. It’s the reason why too many individual shops (ie. not national franchises) have folded, hyperdome best example of management greed and shop close downs.

peterh 4:58 pm
16 May 11
#24

I worked in a store that was located in the glebe park eatery, many years ago. The owner was a mate, and I saw him go without wages to keep the place afloat, he was paying rent, but there wasn’t much left over – food and plasticware were next on the list, with bills last in his priorities. His focus was on the rent. He quit the business after a couple of years, it was sad to see it go, but the cost of running it meant that he had to be there every day that the eatery was open. He had tried, but the rent was the killer – and the end of many other stores in the place.

the conditions are no better in the big centres, if you aren’t keeping the rent up, you may find that your store is locked – so that you cannot get in till the debt is settled. You pay for advertising, you pay for parking, and, in some centres, they ask for your staff’s license plate numbers, to ensure that they are parking in the designated zones, not where customers can park.

Upmarket furniture would have paid less by moving in to the hyperdome. the leisure and lifestyle centre is newer, and is deemed as a more expensive area to lease.

retailers are getting smarter – they are moving away from the centres, using new mediums to advertise and are getting the clients to come to them. The rent is lower, and so is the competition. You will see far more empty stores as they move out, but it is only after the landlords take a hit that they will start cutting rents to attract tenants again.

Grrrr 5:00 pm
16 May 11
#25

junketFunket said :

I thought about that. And I hear the same thing is happening on the Chinese property market. 1000s of buildings being built, no one actually in them, cause if they actually rented it out, it would lower their capital value.

The “whole empty cities in China” myth has been debunked –
1) The photos seen in the articles recently are selective – some areas are smaller than they appear
2) Some areas are actually populated, and just low-traffic at photo time
3) China likes to build whole cities and then populate them, I guess it’s efficient (just ask the Village Building Company here in the ACT)

Back onto topic, I’m also suprised that empty tenancies haven’t been rented out cheaply and had their rents jacked up on them later. I’ve heard of a business on the outer edge of town who’ve had to put up with a 10-fold increase over a period of 2-3 years.

arescarti42 5:39 pm
16 May 11
#26

Grrrr said :

The “whole empty cities in China” myth has been debunked -
1) The photos seen in the articles recently are selective – some areas are smaller than they appear
2) Some areas are actually populated, and just low-traffic at photo time
3) China likes to build whole cities and then populate them, I guess it’s efficient (just ask the Village Building Company here in the ACT)

Hmmmm, I’m not so sure about that, although that’s not to say there isn’t some selective journalism going on.

http://www.sbs.com.au/dateline/story/about/id/601007/n/China-s-Ghost-Cities “It’s said there are around 64 million empty apartments in China”.

Sure that doesn’t sound like many for a country with 1.3 billion people, but even if you assume average apartment occupancy of 2 people per apartment (just a guess), that’s enough to house 10% of their population. That the apartments are selling for 100k+ USD, but the average income in China is about $170 a month could have a lot to do with it.

JohnK 4:53 pm
17 May 11
#27

emd said :

Basically, if you’re a retailer, you need to be in a mall in Canberra.

Part of a lease agreement with the bigger malls is that they get to analyse your accounts. If you do well, your rent goes up… basically they decide what revenues they will leave you with.

junketFunket 10:57 pm
17 May 11
#28

JohnK said :

emd said :

Basically, if you’re a retailer, you need to be in a mall in Canberra.

Part of a lease agreement with the bigger malls is that they get to analyse your accounts. If you do well, your rent goes up… basically they decide what revenues they will leave you with.

Really? So do different businesses pay different amounts or is the price set according to the space and location? Cos I would’ve thought different businesses would have very different levels of profit? Like I’m sure JB-Hifi would make a lot more money than say, Man 2 MAn. So if JB-HiFi moved into Man 2 Man’s space, would they be expected to pay more and if Man2Man moved into JB-HiFi, would they be expected to pay less than JB?

dungfungus 9:23 am
18 May 11
#29

The secret to success in retailing, according to a Jewish friend of mine, is to get the best position in the most active shopping precinct. Preferably he said, choose a shop between Woolworths and Coles and name it “Main Entrance”

shadow boxer 9:39 am
18 May 11
#30

JohnK said :

emd said :

Basically, if you’re a retailer, you need to be in a mall in Canberra.

Part of a lease agreement with the bigger malls is that they get to analyse your accounts. If you do well, your rent goes up… basically they decide what revenues they will leave you with.

Very true, it gets worse because the big malls also like to encourage churn, i.e. if they see a candidate that might make more money for them than you do they can make your business unviable or just not worth the effort, new guy moves in makes lots of money off the novelty factor then they get churned as well.

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