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

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.

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.

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.

Timely article and some sad comments about small (now micro) business on this link:

http://www.news.com.au/business/business-smarts/australia-shuts-up-shop-malcolm-farr-on-the-effect-the-gfc-has-had-on-your-local-stores/comments-e6frfm9r-1226056709832

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.

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.

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.

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.

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.

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.

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…

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.

$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.

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 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?).

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

“An annum”, love it! 🙂

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.

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.

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.