A merger between David Jones and Myer would be a windfall for shopping centre landlords and would speed the use of space currently occupied by department stores for more profitable retailers, according to real estate agents.
On average a department store pays only $200-$250 per square metre over space of up to 20,000 sqm on 20 years leases with options over 20 by 20 years. Any leases that would be broken would require an exit payment to a landlord.
In contrast, stores such Zara, Top Shop, Top Man and the incoming H&M in Melbourne, occupy much less space at between 1000 to 2000 sqm, yet can pay as much as $6000 to $8000 per sqm.
Given the relevance of a department store - both Myers and David Jones - is diminshing, property agents say the potential closure of a big box anchor does not strike as much fear for a landlord than it would have 5 to 10 years ago.
In many malls, the best performing stores, as evidenced by the sales per square metre, are the supermarkets and food courts. In new developments more space is now being allocated to food and food shopping and less to traditional apparel.
In the past 30 years as the large shopping centres were being built, they allocated space for the department store chains to be the anchor for attracting customers. That led to the opening of stores across the country with no regard or research into the demographics of the area.
But many of the stores lost money as the shoppers preferred the discount chains than the upmarket department stores.
In response to the now widely available research on catchment areas and shopping habits, the department stores are closing down less relevant stores as the leases come up for renewal.
Stockland says its new and revamped centres at Shellharbour and Townsville are anchored by Myers and have been trading strongly.
However other retail landlords say stores in the central business districts are struggling to compete with the wave of international store openings and the variety of other outlets on offer.
To try and claw back lost sales and reluctant consumers, Myer and David Jones are reducing store locations and the size of the outlets.
As a shopping centre is developed, the department stores are opting for small footprints and what is now termed ‘‘village formats’’.
This has occurred at the AMP Shopping Centre-owned Macquarie Centre, Westfield Miranda and Claremont in Perth.
David Jones confirmed last year it was conducting an extensive review of its property portfolio as its heads into a period where leases are expiring and stores are being redeveloped into smaller formats.
The search is also on for new sites in neighbourhood strips across the country, of about 7000 square metres, based on the village format store in Malvern, Melbourne.
It is one of the most thorough reviews being planned by the department store chain in many years.
In the past, the leases were automatically rolled over, irrespective of the performance of the stores.
But in the next five years, leases for six stores will expire, and David Jones is expected to vacate and use the opportunity to take up smaller spaces in locations better suited to its prestige demographics.
Outgoing chief executive Paul Zahra said at the first-quarter results announcement last November that the present portfolio consisted of 38 stores, of which six leases, in "less robust demographies", were due to expire in the next five years, and another three stores were to open by 2016 "in attractive demographies".
Suburbs such as Mosman, and Toorak in Melbourne, would be targeted for smaller, village-style stores, if space of about 7000 square metres could be found.
The six leases that expire are at Wollongong (October 2015); Birkenhead Point (September 2014); Harbour Town, Queensland (June 2015); West Lakes, South Australia (December 2015); Glen Waverley, Victoria (April 2016); and Macarthur Square (April 2017).
Myer also continues to optimise their store network, focusing on maximising returns per square metre. They recently closed the Fremantle store, and the Elizabeth store is scheduled for closure next month.
Nora Farren, the director of research at Colliers International, said space optimisation projects are underway in eight stores, with floor space expected to be handed back across the majority. Myer had planned to open stores in Greenhills in 2016/17 and Plenty Valley in 2017/18, but these are now under review.
Myer currently has nine stores in planning and development.
‘‘We anticipate the partial hand back of department store floor space to gather momentum over the next few years, which is a favourable outcome for regional centre owners,’’ Ms Farren said.
‘This space is then able to be re-leased at more lucrative rents to retailers with higher productivity. It also provides the opportunity for international retailers to enter regional shopping centres as large tracts of space is freed-up.’’
Simon Wheatley, head of property research at Goldman Sachs said the department chains are looking at downsizing and the landlords can now use the space for higher rented sites.