The oxymoron hitting retail property – a ‘growth recession’

The Lazarus of the Australian economy – consumer spending – seems to be starting to recover from the dead zone created by Budget-related shocks. But how long can it last? The long-term prognosis remains troubling.

BT Investment Management’s Real Estate Investment Trust (REIT) Portfolio Manager Julia Forrest explores the relationship between consumer spending and retail property.

A growth recession?

As I am sure all readers will recall from their school days, an oxymoron is a combination of contradictory words. Cruel kindness, for example. The term comes from the Greek for ‘pointedly foolish’, but those in Australian retail property may be feeling that the somewhat oxymoronic-sounding ‘growth recession’ is more serious than that.

As we have written previously, virtually none of the Federal Government’s cuts and increased costs is likely to be passed through the Senate. This is good news for the retail sector as if some of these measures were to make it through annual household income would drop by over $600, causing big spenders on low to medium incomes to think twice about splashing out on the next big purchase.

While a small bounce back in consumer confidence has seen a slight pick-up in retail sales over the last few weeks, this may not be enough to save spenders from having to tighten their belts and save the retail property sector from pain. For over five quarters Australia has registered annual growth at less than 1%, which is disturbing news considering Australia’s population growth stands at 1.8%.

It’s almost like a recession on an economic growth per capita basis and that is why things are tough for retail and likely to remain tough.

GDP per capita is moderating…


…affecting retail sales in 2014


There’s a strong warning signal for retail sales

Over the past three years interest rate cuts have prompted some improvement in retail sales. Even with rates kept at historic lows this streak won’t continue. Australians just aren’t interested in borrowing – they’re keeping 24 months ahead of their mortgage repayments and getting better at saving. Consumers have already stopped spending on big ticket items like overseas holidays and cars – new car sales are falling 3% year on year.

Looking to the future, there’s one warning signal investors must not miss – household income growth – and this has dropped from 11% in 2007 to just 3.5% in 2013. This typically correlates with a 2% drag on retail sales, which, closely followed by falling rents, weakens retail property yields.

What it will take for conditions to improve?

There’s still a world of opportunity in retail property if you know where to look. Very high population growth in Australia (the highest in the developed world) ensures continued demand for quality shopping centres, but there are some major challenges ahead – rising online sales, the growth recession and lacklustre pay rises will be compounded when interest rates rise once again.

For a sustained increase in retail spending and a retail property boom, we need to see improving income growth, solid house price growth and growing confidence in the economy and the Federal Government.


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