Gerry Harvey warns of commercial property chaos: Gottliebsen

Harvey Norman is a massive investor in shopping centre property and one of the reasons it retained a big property investment when others were taking big profits and leasing back was to avoid owners who are prepared to increase rents when retailers are in

All those who have investments in shopping centres should heed the reasoning of Harvey Norman chairman Gerry Harvey very carefully.

Harvey Norman is a massive investor in shopping centre property and one of the reasons it retained a big property investment when others were taking big profits and leasing back was to avoid owners who are prepared to increase rents when retailers are in trouble. But Harvey Norman does not own all its centres and one of Gerry’s landlords has decided to play hard ball.

Gerry Harvey is considering teaching the landlord a lesson about downturns. Gerry explains that the landlord is a large institution that is owned by superannuation funds. Let me use my own words to describe what is happening:

Harvey to the fund manager’s agent: “We’ve got two stores where you’re the owner and landlord. Both of the stores are losing a lot of money. I want to close these stores.”

Fund manager’s agent to Harvey: “Your contracts forbid you to close. And moreover your rent is going up. Pay up and smile, and by the way the fund manager can’t be bothered talking to you. Matter closed.”

Harvey to me. “So this is going to come to a bit of a showdown [my emphasis] with these people. If we close those stores, they will have to write down the value of that property, which they haven’t done at the moment. They will not write it down unless forced to.

“Not only will we not be there, but their other tenants in those centres will be severely impacted because Harvey Norman’s the anchor tenant and won’t be there. So that’s an interesting little scenario coming up.”

What a foolish landlord. When the superannuation fund reports to their clients they will have tell them that they are taking Gerry Harvey to court in a five-year battle which will end in the High Court. Meanwhile the shopping centre will have needed to be slashed in value.

The simple fact is that in times like these, lease agreements are not worth much. The whole idea is to keep the tenants in the building. Rents will fall, so values will come down, but by far less than if the building is empty. Sometimes landlords have geared heavily and will have to go to their lenders and explain the position.

Remember that if Harvey Norman is suffering, then the vast number of smaller retailers will be bleeding even more. And next year, as Harvey explained me, many will have to raise prices, which will hit them even harder.

Landlords that don’t understand the game will suffer the fate Gerry Harvey is planning for the unnamed institution mentioned above. The general expectation is that most commercial property in Australia will fall on average by between 25% and 30%. Some will fall by more while other properties will hardly be affected.

We’ve seen ING Office sensibly making a share issue. Others must follow. And the sooner fund managers face up to this situation the better.

The fund manager that Harvey is talking about may have to write the centres down by 60% when Harvey closes the stores. But the fund manger will have learned a very valuable lesson about what you do in a severe downturn.

This article first appeared on Business Spectator