Australia Retail White Paper MARCH 2014 Retail turnover accelerates: Can recent consumer spending growth be sustained? NORA FARREN Director, Research Retail There has been clear improvement in the retail spending environment over the last six months as consumers increased their spending activity. What has been driving this change in behaviour and can this been sustained? It now appears that households are moving from high levels of savings and a period of spending restraint to increase consumption. The combined picture from recent retail sales data and the broader consumption measures reported in the national accounts indicates solid momentum in spending. Interest rate cuts have fuelled strong growth in house prices, which have strengthened household balance sheets and improved consumer confidence, driving an increase in spending. The lift in retail spending has now been sustained for a six month period, and is helping to offset soft business investment as the economy transitions away from relying on the mining sector to drive growth. The weaker Australian Dollar (AUD) has also assisted curtailing some of the spending leakages to offshore online shopping and outbound tourism. With growth in retail turnover a key driver of the performance of retail property, the recovery in spending will begin to flow through to increased demand for retail floor space and occupancy levels, which will in turn support asset values and cap rates. The changing patterns of consumer spending also foreshadow the likely performance across retail property types.
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Retail Sales Annual % Change Consumer Sentiment Index Discretionary Spending Drives Retail Turnover Growth The most recent retail trade figures from the ABS for the month of January 2014 jumped 1.2%, continuing the strong run of spending growth that started in August 2013. The Reserve Bank (RBA) left the cash rate unchanged at their most recent meeting in March, for the eighth consecutive month. The last change to the official cash rate was a 25 basis point cut in August 2013. Since then consumers have clearly and consistently responded. Annual retail sales turnover growth is currently running at 6.2%, its highest rate of growth since November 2009. The healthy increase in retail spending over the past six months annualises out at a very strong 9.4% per annum. Interestingly, recent increases in turnover were driven by a lift in discretionary spending. Non-food retailing having lagged over the past few years is clearly improving and catching-up to food/cafes. Growth was strongest in the department store sector recording an increase of 2.6% in January. Turnover continues to be very strong at cafes and restaurants, which rose by 2.0% during the month, taking annual growth to an astounding 11.9%. This is particularly helpful to domestic growth, as unlike spending on imported goods, money spent eating out benefits the local economy. Retail Spending Goes Against Confidence Levels Post Federal election consumer sentiment rallied from August through to November, but reversed in late 2013, with sentiment falling further over the first three months of 2014. The run of bad news around the motor vehicle industry, other manufacturers and Qantas has clearly impacted confidence. Overall, consumer behaviour has been very hard to get a clear read on of late, with confidence levels volatile. Consumers remain susceptible to bad news on the jobs front and international economic events. Recent news of job cuts in the manufacturing sector has had a marked impact on job security expectations. Measures of consumer sentiment remain a little above average, notwithstanding a small decline. Despite this, retail sales through the latest downturn in sentiment have been buoyant. While traditionally there is a strong relationship between consumer sentiment levels and movements in retail turnover, the last few months has seen a disconnect emerge. Retail Sales and Consumer Sentiment 14 130 12 120 10 110 8 100 6 4 90 2 80 0 70 Retail Sales (LHS) Source: ABS/Westpac-Melbourne Institute/Colliers International Consumer Sentiment (RHS) 2 Retail White Paper March 2014 Colliers International
Dwelling Approvals Annual % Change Retail Sales Annual % Change While traditionally there is a strong relationship between consumer sentiment levels and movements in retail turnover, the last few months has seen a disconnect emerge. The level of consumer sentiment declined in both December 2013 and January 2014, yet retail sales turnover growth was much stronger than would normally be expected. There are some caveats around seasonality across the December-January Christmas and sales period, but overall recent indicators of broad consumption are positive. Retail Sales and Dwelling Approvals 50% 40% 30% 20% 10% 0% -10% 10% 9% 8% 7% 6% 5% 4% 3% Consumption Expenditure Growth Solid The most recent GPD figures for the September quarter 2013 show strong growth in consumption expenditure. Annual growth in household spending lifted to 2.6%, up from 2.1% the previous quarter. The lift in spending suggests that low interest rates are having the desired impact on consumers. There have been decent lifts in the discretionary areas of retail trade which is generally associated with a lift in consumer confidence. The outlook for retail spending will also benefit from the decline in the terms of trade that has occurred, as it is supportive of future income growth and in particular, corporate profits and wages growth. Looking forward these improvements will help boost consumer and business confidence over the course of 2014. Household Wealth Fuelling Momentum Household wealth has continued to increase strongly in recent quarters and is estimated to be 10% higher over the year to December 2013. This increase has been driven by higher equity and housing prices, as well as continued saving by households. Forward-looking indicators point to relatively strong growth in dwelling investment over the course of 2014. More so than most other developed markets, prices and activity in Australian housing are extremely sensitive to changes in mortgage interest rates. The Australian housing market cycle is typically a lagged reflection of the mortgage interest rate cycle and the impact it has on housing affordability. The correlation between trading conditions in the retail sector and mortgage rates has historically been very strong. Higher house prices and the associated increase in housing turnover are also expected to support a pickup in renovation activity, which will benefit the household goods sector and see the bulky goods sector capture the cyclical uplift. During the month of January, household goods retailing increased by 1.5%. This category has been a weak spot over the last five years, averaging around 1% annual growth. This compares with average growth of 7%+ in the 10 years prior to the GFC. We are now starting to see a pick-up in turnover across housing-related segments, which are expected to continue through 2014. -20% -30% -40% 0% Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Source: ABS/Colliers International Dwelling Approvals (LHS) Retail Sales (RHS) The Housing Market and Retail The increase in retail spending growth reflects the impact of record low interest rates on consumers and a lift in household wealth flowing through from higher asset price. Positive sentiment and increasing house prices directly impact on how wealthy consumers feel and in turn their propensity to spend. The large gains in house prices recorded last year (particularly in Sydney +14.5%, Perth +9.9% and Melbourne +8.5%) have been reflected in strong retail turnover in these markets. Consumption expenditure growth has also been solid in these markets. Retail turnover in New South Wales grew by a very solid 2.1% during January; the strongest monthly gain since the government s direct cash payments to households in December 2008, and previously around the time of the Sydney Olympics. Annual retail sales growth in New South Wales is currently 8.3%, with economic growth across the state also picking-up as it benefits from a notably stronger housing market since early 2013. Victoria is also experiencing strong annualised retail sales growth at 6.5%. Across other states, growth in Queensland is running at 5.4%; South Australia 4.4%; and Western Australia recorded 2.9%. The New South Wales and Victorian economies tend to generally be more sensitive to cuts in interest rates, with households more likely to change their spending behaviour in response to lower rates. Overall non-mining states are showing clearly better momentum than mining states. There has also been a solid increase in housing finance, particularly for investors over the past year. Low interest rates, pent up demand for housing and solid population growth mean that the underlying drivers for an increase in residential housing construction are in place. Recent dwelling approvals data confirms this lift is underway. The number of residential dwelling approvals jumped 6.8% in January, up nearly 35% in annual terms. Approvals are at their highest monthly level since October 2002. Elevated levels of housing construction activity will be another positive influencing factor on retail spending levels. 2% 1% 3 Retail White Paper March 2014 Colliers International
Overseas Investors Support Retail The impact of offshore investors on the residential market is another theme with flow-on effects for the retail sector at present. This is through both increased demand and prices for housing and retail in general, as well as the luxury retail sector more specifically. According to the most recent data available from the Foreign Investment Review Board (FIRB) there was $17.2 billion worth of approved residential property investment coming in from overseas in the year to June 2013. Chinese buyers are currently spending approximately $5.9 billion a year on Australian property (both residential and commercial). Offshore investors spent approximately $1.5 billion on retail assets in calendar year 2013, and were a major driver of investment activity. Demand from international investors is coming primarily from global pension funds, sovereign wealth funds and unlisted investors. level is supportive of not only attracting more overseas visitors to Australia, but also acts as a disincentive for Australians to take offshore holidays, particularly to the US. This is expected to benefit domestic retailers and leakage to overseas will diminish. While net tourism flow has previously been a major negative, this should reverse. The lower AUD also impacts the price advantages of offshore online retailers, and the amount that Australian s spend online with international retailers. As the AUD declines we have seen a corresponding moderation in the growth of online retail. According to the NAB Online Retail Sales Index, annual growth is running at 11.3%. While still prolific, recent online growth has been more subdued than the 20-30% growth rates recorded between 2010 and 2012. A substantial gap now also exists between the stronger growth in domestic online retailing, and the virtual stall in growth in international online sales, which is most likely currency related. Good news for domestic retailers is that they are winning a The Block Arcade, Victoria Similar to the residential market, the majority of capital is coming from Asia. The strong purchasing power of Asian consumers and preference for luxury goods will further support growth in retail spending through the current cycle. Lower AUD to Benefit Tourism and Domestic Online Also expected to drive retail spending is the sustained low level of the Australian Dollar. Since August 2013 the AUD has fallen approximately 10% to currently be around US90 cents. This greater proportion of total online sales revenue, with around 74% of online retail sales. This has occurred as increasingly Australian bricks-and-mortar retailers are developing sophisticated online offerings to complement their traditional shop fronts. On the other hand, the depreciating AUD may negatively impact retailers gross profit margins, if higher costs are unable to be passed onto consumers. The degree of this impact will be checked by the strength of the recovery in retail sales, the level of hedging and amount of investment that retailers have made to drive business efficiencies over the past few years. 4 Retail White Paper March 2014 Colliers International
Savings Ratio Falls Consumer activity lifted at the end of 2013 at the expense of a reduction in the savings ratio. This indicates that households have an increased appetite for spending, and some risk appetite also. After having hovered at historic highs, the savings ratio fell by almost a full percentage point to 9.7%, the lowest level since June 2010. The savings ratio rose sharply when the GFC occurred and has largely remained above 10% in the years following. The recent decline indicates that consumers were opening their wallets more freely in late 2013 than they had for over three and a half years. Although, the ratio is expected to remain elevated in the short-term as unemployment fears persist, which will act as a minor headwind to consumer spending. Population Growth to Boost Retail Demand Another factor expected to support not only retail spending but demand for retail floor space, is population growth. Underpinning demand for housing is net overseas migration into Australia, which is fuelling stronger population growth. Over the twelve months to June 2013, Australia s population increased by 1.8%, which is the largest annual increase since September 2009. The latest readings for net overseas migration from mid-2013 are remarkably strong at 244,000 per annum more than 90% above the long-term average of 129,000. Net migration will be one of the most important drivers of retail spending as we move through the next cycle. Outlook The outlook for the domestic economy is a little stronger over 2014. While the RBA has noted recently that it expects the unemployment rate to tick-up over the near term, forward looking indicators of the economy are picking up. Non-mining parts of the economy are starting to improve as it transitions away from reliance on mining investment. Low interest rates are expected to continue to stimulate prices and turnover in the established housing market as well as dwelling construction. The recovery in retail sales will continue to be driven by the low interest rate environment, a strong housing market and improving consumer sentiment and business confidence. The influence of offshore investors on Australian property markets is also relevant for retail. A potential drag on consumer spending will be the fact that wages and salaries growth remains on the soft side, reflecting weakness in the labour market and job security concerns. This will act to curtail consumer exuberance and spending activity in the short-term. Although, leading indicators of employment demand are moving in a positive direction. A combination of these factors should continue to improve sales growth in 2014. Over time, these conditions will lead to higher general consumption and retail spending. Any sustained recovery in retail spending will improve demand for space and occupancy trends. 5 Retail White Paper March 2014 Colliers International
370 offices in 62 countries on 6 continents United States 140 Canada 42 Latin America 20 Asia Pacific 83 EMEA 85 Primary Authors: Nora Farren Director, Research Retail +61 2 9257 0289 Nora.Farren@colliers.com Contributors: Michael Bate Head of Retail, National Director Retail Lachlan MacGillivray National Director, Retail Investment Services Retail Colliers International Level 12 Grosvenor Place 225 George Street Sydney NSW 2000 TEL +61 2 9257 0222 FAX +61 2 9347 0789 Colliers International A leader in global real estate services, defined by our spirit of enterprise. Through a culture of service excellence and collaboration, we integrate the resources of real estate specialists worldwide to accelerate the success of our partners. We represent property investors, developers and occupiers in local and global markets. Our expertise spans all property sectors office, industrial, retail, residential, rural & agribusiness, healthcare & retirement living, hotels & leisure. Colliers International is Australia s own global real estate success story. colliers.com.au Copyright 2014 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Accelerating success.