Why small high street stores are in decay

I’ve had several calls from journalists around the country over the past month, all with a common thread to their stories. The thread is one of rejuvenation.

It runs something like this. From the Gold Coast highway, Chapel Street and Bridge Road in Melbourne, Oxford Street and Campbell Parade in Sydney, we are in a state of gentle retail decay at the small end of town. Each of these areas is experiencing a lower historic occupancy rate than any time in the last 14 years. And it’s all based around small stores, owner occupied or owned by small family trusts or self-managed super funds. The CBD and close to CBD areas in all of our cities are being rejuvenated by money from the big end of town. 

Why the split?

Well the whole of the small end of the commercial property sector is dominated by these three groups: owner-occupiers, family trusts and SMSFs. And that tends to be lazy money. Now I’m not being rude or judgmental, it’s just an observation. At the small investor level, residential property tends to be funded by negative gearing from salaries. A residential unit that is unoccupied for a few weeks hurts the individual’s cash flow. You may get a tax break at the end of the year, but you need to fund the rent and interest gap quickly or it hurts your lifestyle. I have friends who will throw in a free Samsung TV to get a 12 month residential lease on a unit.

With small commercial retail space it tends to be different. As the ownership is via a company, the cash flow effect of an empty shop front isn’t personal. Sure the fund makes a poorer return that year, but nobody has to take money from their salary cheque to fund the gap between rental income and interest payments. So the small commercial end stays empty longer and has very few incentives, beyond “have six months free rent for a two year lease”. And as they decay, there is less and less landlord investment in them. If you’ve ever seen behind the scenes in many old high street store fronts, you’d wonder why anybody would work there each day.

So the answer? Well other than the normal cycle of new owner-occupiers, trust funds or SMSFs buying these sites and re-investing to bring them closer to new large commercial developments, it’s unlikely it’ll improve much. Current landlords can drop rents further, but at some point somebody has to invest, renew and rejuvenate. Otherwise our high street retail will decay and die the same way as most of Europe’s.

Kevin Moore is a retail expert and the chairman of Crossmark Asia Pacific Holdings.