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PC Report: Ditch planning and retail lease laws

August 18, 2011: The chapters on shopping centres and retail leasing issues in the Productivity Commission’s draft report, ‘The Economic Performance and Structure of the Australian Retailing Industry’ recommends more shopping centre developments and a repeal of laws to protect smaller retail tenants.

The PC report devotes a full chapter to ‘Planning and Zoning’ and the next to ‘Retail Tenancy Leasing’.

The report seems to labour its recommendations to free up state and local government planning policies. The planning and zoning chapter is over twice the size of the chapter on retail tenancy – with most of the points made in the former repeated in the latter.

In short, the PC wants to see more shopping centres in Australia, placed wherever developers want. The recommendations in the Planning and Zoning chapter are overwhelmingly in favour of eliminating most if not all state and local government planning and zoning laws. If shopping centre developers have a free hand to do whatever they want to increase the amount of retail space available, the PC reasons, retail rents will reduce.

It largely avoids the real competitive issue – the imbalance in the rental outgoings of larger retailers compared to smaller retailers, which reduces their ability to compete.

More specifically, the Productivity Commission says, Australia needs to cut the planning red tape and build more shopping centres which compete in the same geographical market.

‘Implementing these reforms would potentially increase competition between shopping centre landlords, and reduce the bargaining power of landlords vis-à-vis their tenants, by improving tenants’ ability to relocate close by and preserve their business after lease expiry.’

It looks approvingly at the US experience, where a freedom from planning and zoning restrictions has resulted in open slather development, more retail space and lower rents. (It has also resulted in over 400 ‘dead malls’ blotting the landscape and towns with the hearts ripped out of them – but hey, that’s the free market for you. Gotta break some eggs to make an omelette! )

Here’s what the Westfield submission to the enquiry had to say in comparing its experiences in the US, the UK and Australia:

• The United States has the least regulation and consequently has the highest level of retail floor space per capita.
• The United Kingdom has the highest level of regulation and consequently has the lowest level of floor space per capita.
• Australia has a level of regulation in between that of the United States and the United Kingdom and levels of floor space per capita are consequently in between.

Westfield also notes that ‘Australia has taken the middle ground between the US and the UK in providing neither too much nor too little floor space.’

Sounds like Australia has got it about right according to Westfield, but not according to the Productivity Commission:

‘In other words, more restrictive planning and zoning regulation creates a less intense competitive landscape in Australia, which in turn, alleviates pressure on Australian shopping centre landlords to offer retail space on terms more favourable to their tenants.’

The PC’s recommendations on planning and zoning are variations on the same theme – deregulation of development:

– State and territory governments should broaden zoning within and surrounding activity centres to facilitate new retail formats locating in existing business zones.
– Local governments should significantly reduce prescriptive planning requirements to facilitate new retail formats locating in existing business zones and ensure that competition is not needlessly restricted.
– Governments should not consider the viability of existing businesses at any stage of planning, rezoning or development assessment processes.
– Local governments should facilitate more ‘as-of-right’ development processes to reduce business uncertainty and remove the scope for gaming by competitors.
[‘Gaming’ being objections from interested parties with vested interests such as retail or property-developing competitors. This is largely a reference to Aldi and Costco.]
– State and territory governments should ensure third-party appeal processes within planning systems include clear identification of appellants and their grounds for appeal and allow courts to award costs against parties found to be appealing for purposes other than planning concerns.
– State and territory governments should reduce the compliance costs associated with planning systems and development approvals by implementing the leading practices identified in the Commission’s recent benchmarking report on planning, zoning and development assessments.

(The Productivity Commission seems a bit miffed – if such a bloodlessly utilitarian organisation can have emotions such as miffed-ness – that recommendations made in a 2008 report, and repeated in this report, haven’t been implemented.)

Ditch retail tenancy laws!

While the two chapters combined comprise about 50 heavy-going pages of text, there is only a paragraph or two on the issue which the many thousands of independent and small-chain retailers are most passionate about: The relative high cost they pay compared to competing larger retailers in the same shopping centre.

This is passing strange in a country with a shopping centre oligopoly and a grocery store duopoly distorting the retail leasing market, but illustrative of the Commission’s tendency to ride its hobby horses hard while skirting around any hurdles placed in front of them. Whoa Nelly!

As the Red Group notes in its submission: ‘Rental costs are a significant impost for physical store operators, ranging from just over 2 percent for JB HiFi to in excess of 20 percent for specialty retailers.’

(This 10x premium paid by small retailers was confirmed in recent discussions with outgoing Ted’s managing director Richard Robertson. And Ted’s presumably has some negotiating leverage – heaven help a ‘mum and dad’ operation negotiating a shopping centre lease!).

Westfield’s rationale for charging some of of its tenants not twice as much – but 10 times as much – for the same space is thus:

‘Major tenants, such as supermarkets and department stores pay lower rents per square metre, but they also contribute more capital to the construction of the store, take longer term leases, up to thirty years in some cases, and take much larger stores. They also offer a point of difference to the shopping centre and so have a stronger negotiating position. Major stores bring foot traffic from which speciality stores benefit.’

(OK – but if I were to buy, say, 100 cars from Ford, would I get them for one-tenth of the price of someone buying one car?)

At the very end of its chapter on retail tenancies, the PC report concedes that: ‘Where there is a large shopping centre landlord and many small existing and prospective tenants competing for limited retail space, imbalances in negotiating power are likely to exist..’ (Surely not!)

‘Large shopping centre landlords are able to offer contracts in a retail tenancy market on a ‘take it or leave it’ basis…’

Once again, the PC identifies pesky limitations to the rule of the free market as the cause of usurious rents to small retailers, rather than unconscionable conduct by shopping centre landlords trying to make up their losses after being screwed by their larger tenants.

But this time it isn’t planning laws, but retail tenancy legislation which is to blame. This is the same retail tenancy legislation which was put in place in Australia in the 1980s and ’90s to counter the impacts of a concentration of market power in the hands of a small number of large retailers and shopping centre developers!

‘Retail tenancy legislation currently contains many provisions regulating the relationship between tenant and landlord which unduly impede commercial contractual arrangements,’ the PC hurrumphs. ‘Examples of such provisions include minimum lease terms, preferential rights of lease renewal, liability attached to lease assignment and outgoings inclusions.

‘Winding back such legislative provisions, that intrude into negotiated contractual arrangements, could occur once the planning and zoning reforms are implemented and there is evidence they are having an impact on the retail tenancy market. Such an approach would provide the added benefit of reducing the differences that exist between the current regulation in the various states and territories. Less prescriptive regulation would also reduce constraints to the efficient operation of the retail tenancy market and lower compliance and administrative costs for retailers, landlords and governments.

So to summarise, the PC’s two suggestions are:
– First, eliminate zoning and planning laws around Australian;
– Then, repeal retail tenancy legislation put in place to protect small retailers from unconscionable conduct..

That should work a treat.

– Keith Shipton

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