Despite Retail Cuts, REIT’s Can Still Be a Handy Source of Income

Dear Reader,

Who doesn’t love a bargain?

The inner smugness as you hit ‘buy now’ on your favourite shopping platform. Or, shoulders back as you strut towards a cash register to claim your prize.

Your only fear is that it might all be a terrible mix up. That the discount doesn’t apply to your item.

The debate about need versus want can avail itself another day. For today, in your own small way, you beat the system.

Truth be told, you might not wear or use that bargain…ever.

But that doesn’t matter. The real joy has already been had, knowing you saved an absolute motza on your purchase.

For consumers, the news has been good for a long time. It doesn’t cost you any more to buy a pair of jeans or a shirt today than it did a decade ago.

Unless you’re into the top-end kind of stuff. Demand has almost outstripped supply for brands where some are only too happy to drop a couple of grand on a purse or a nice new jacket.

Endless sales and competition have kept a lid on prices for the bulk retailers. However, it has also caused something a bit more sinister — deflation. Some goods have actually gotten cheaper over time.

In normal circumstances, deflation should be the result of a slowing economy. An economy where credit and lending is tight.

Yet price deflation for retail goods has happened in a time when money and cheap credit has never been more readily available.

Some of that might price deflation might be due to increased productivity — that is one way to lower prices.

For many retailers, however, the only way left to cut costs is to have as few staff on the ground as possible. And to keep trimming margins from their helpless suppliers.

As many can attest, just trying to find someone to serve you, let alone process your payment at a register, can be almost impossible.

Free Report: Economist reveals five stocks to sell today. Download now.

We are conditioned not to pay full price

The other driver of lower prices is endless competition. Can you remember the last time you paid the full retail price on anything?

So used to the endless sales have we become, that we are now conditioned not to pay full price. Even if something is not currently on special, you know that it is only a matter of time.

That is why the Boxing Day sales have slowly but surely expanded. Both Myer and David Jones sales only ended a week or so ago. And plenty of sales kicked off well before Christmas.

All in the hope of keeping the registers ticking over.

Staff costs can be one way to contain expenses in a tough retail environment. Such as employing younger and fewer staff.

Some cafes and shops — and other small businesses — have simply decided not to open if they have to pay penalty rates. Or if they do open, it is mainly family members working the till.

Trimming staff has always been one way to trim costs. However, for the first time in memory, retailers are attempting something that has always been deemed impossible. That is, a cut in their hefty rents.

As the property market continued its bubbly rise, so too did the rent. Massive cornerstone tenants, like Coles and Woolworths, had the clout to negotiate. However, smaller retailers bore the brunt, as mall owners kept ratcheting up the rent.

But as we have seen over the past year, and particularly in the past few months, some of the bigger and better-known retail operations have had to shutter their doors.

High profile retailers like Harris Scarfe, Bardot, Jeanswest and Curious Planet (formerly Australian Geographic stores) have all gone into administration in the last month.

While there is hope some of the Harris Scarfe stores might remain operating, this group of four account for almost 290 shops. Not to mention sadly putting thousands out of a job.

Other higher profile retailers, like Myer and David Jones, are looking to reduce their floor space, as well as a reduction in rent.

Fair to say that some of the shopping malls will start to feel the pinch. Not to mention the owners of all those empty shops you see on retail strips.

Will it scare investors out of the commercial property market?

All this might be enough to scare investors out of the commercial property market. In particular, those real estate investment trusts (REITs) with direct exposure to retail shopping centres.

For income investors, these mega-REITs (and others) have been a reliable source of income, with yields often multiple times higher than those available from term deposits.

To cut REITs completely out of your holdings however — especially with rates so low — could put a real dent in your income.

Plus, all REITs are not the same.

While retail is certainly feeling the pinch, there are REITs with exposure to office and industrial property, like those huge multi-hectare industrial parks that are still doing fine.

Plus, for REITs, while the sector they operate in is important, there are other equally important factors that determine their value. Like interest rates and the health of the economy.

If rates should rise and the economy stumble that is when you will likely see a correction in the REIT market. For the moment, however, if you are careful in which ones you pick, REITs can still prove to be a handy source of income.


Matt Hibbard,
Editor, The Rum Rebellion

PS: There’s a BIG surprise coming for the AUD in 2020. Click here to find out what it is (free report).

The Rum Rebellion