BusinessEconomics

The Bubble in Brisbane

So you can’t see a bubble until it bursts. Unless you see glimpses of the light shining on it, as I have, you generally don’t see it or feel it unless it bumps right into you and all of a sudden you see it, and you become mesmerised as you wonder, will it hold or will it burst. I’m sorry to tell you that all bubbles burst and this one is going to be a beauty.

There’s been lots of rhetoric from retailers about the high rents charged in shopping centres and there is increasing pressure on these businesses for two reasons:

1. More competition within the shopping centre.
2. Less foot traffic in the shopping centre.

With less people shopping and the pressure to make increased rents, there are some alternatives for businesses:

1. Close
2. Keep trading
3. Raise prices
4. Change consumer offerings to draw the crowds
5. Entertainment

Take a moment to think about your own habits. When was the last time you went to a large shopping centre? Why did you go there? Did this visit result in a sale? Did you eat while you were there?

Eating while you’re there is a crucial factor. The big shopping centres can see the future of the online ‘threat’ and are trying to entice you in with unique food and entertainment opportunities to keep you coming back. Meanwhile, the stores are not seeing conversions to sales, but rather lots of lookers and wanderers. There may be some spontaneous purchases but generally not the original reason the consumer visited the shopping centre.

With the increased food and entertainment competition, each food business is suffering by being able to trade less and less of the pie but being asked for more rent.

Now an obvious solution may be to not trade within a shopping centre, but to find a freestanding storefront right? WRONG. This is where the biggest bubble is.

Within the city of Brisbane most rents for ground floor storefronts, regardless of size, start at $2,000 a WEEK. This price is driven by the banks, not the landlords. The banks have valued these properties at X dollars based on the rents they are expected to be able to generate, which they have set, starting at $2,000 a week.

To earn this, cover wages and operating expenses, business need to turn over at least $15,000 a week. Some are doing it, while others cannot come close and not because their business model is bad, but because consumer spending is dropping no matter what the statistics from government may say.

So this is a lot of pressure right? So lets say the owner of the business and the landlord come to an agreement regarding rent and he offers to reduce the rent to $1500.00. Big mistake by the landlord. The bank is now unhappy. The property value was based on the amount of rent it could generate. So lets say the property was valued at $1.2 million. If the landlord can only get $1500 a week, then the property value drops to $750K. This means the bank has leant over $500K of basically worthless money and they will be asking for that back, pretty much straight away.

So the landlord is trapped in what they can ask for in rent. The banks will not budge. So the business folds if it can’t make rent. Another tenant is found and the whole cycle starts again.

But here is the thing and where the bubble is – it’s impossible to make these rents in a city that is flooded with options and where consumer spending is dropping. This means the landlord will be struggling to find rent each week.

Now multiply this scenario by a few thousand properties that cannot be rented, and you have yourself a bubble. These properties will soon come onto the market, given the interest only period loans will soon expire, and refinance will pretty much not be an option. So you have to find the rent or sell the property. There will be a huge selection of properties coming onto the market from landlords in distress and they will be sold for way under what they paid, actually returning the market to a more accurate valuation.


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