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the business by building a stronger team, lifting productivity, and
improving stock flow. Bunnings indicated that it will continue to focus
on its physical reach in terms of store format flexibility, and continued
network development & reinvestment
1
.
HOME IMPROVEMENT AND OUTDOOR LIVING MARKET
Bunnings estimates the size of its addressable market in home
improvement and outdoor living in Australia to be sales of $48
billion per annum, of which its share is 19 per cent
2
. A number of
factors drive the growth of the home improvement and outdoor
living market including: household disposable income, renovation
activity, housing churn, value and formation, weather, lifestyle and
demographic trends, government activity and technology.
The market accounts for both consumer and commercial customer
demand and includes: hardware and fixings, tools, plumbing, building
materials and supplies, garden and landscaping supplies, lighting,
paint, kitchen, laundry and bathroom supplies, gas appliances, floor
and window coverings, outdoor furniture, storage and housewares.
There is a wide array of competitors operating from a variety of
different formats including: category specialists in plumbing, electrical,
lighting, timber and garden supplies; hard goods mass merchants,
suppliers direct-to-market, home improvement products sold in
discount department stores and supermarkets, and other small and
large format home improvement retailers
3
.
RETAILING MARKET AND TRENDS
The Trust’s customers are predominantly sellers of retail goods or
services in the home improvement & outdoor living, office supplies,
outdoor leisure, automotive sales, and electrical and small
appliances categories. Economic, technological, demographic and
other trends that affect retailing generally, or certain aspects of
retailing, may impact our customers from time to time. While the
Trust’s rental income is not directly linked to the sales turnover of
the retailers, difficult retailing conditions or structural changes in
retailing can impact on the demand for retailing space, affecting
market rents, and in some cases may affect the longer term
viability of some retailers.
Retailing continues to evolve rapidly, in line with changing customer
needs, and also changes in technology, supply chains and sourcing.
The quality of the Trust’s property investment portfolio, with its
large, prominently located sites means that generally these should
continue to be preferred locations for retailing or provide potential
longer term alternative uses.
RISK CONSIDERATIONS
The Trust has a culture of balancing the commercial imperative
of delivering a sustainable return to unitholders, with a
strong focus on compliance and risk management, to meet the
requirements of all stakeholders. The Trust is subject to high
levels of regulatory oversight, in part because of the “related
party” characteristics of the ownership structure, and the ASIC
AFS licencing aspects of its underlying business/structure. The
processes/systems required to support the compliance regime are
an important aspect of the Trust’s approach to risk management,
providing transparency and oversight at an operational level in the
business. The processes and systems are set out in a Compliance
Plan, which is reviewed annually by the Board.
1
Source: Wesfarmers Strategy Briefing Day, 22 June 2016, pages 44 to 48
2
Source: Wesfarmers Strategy Briefing Day, 22 June 2016, page 38
3
Source: Wesfarmers Strategy Briefing Day, 22 June 2016, page 41
FINANCIAL RISKS
The Trust is well positioned from a financial risk perspective with
the majority of its counter party exposure to Wesfarmers Limited
(A- S&P rating, A3 Moody’s rating). The Trust’s assets comprise
a geographically diverse portfolio of large format retail properties,
generally with long term leases in place (99.7 per cent occupied at
30 June 2016, with a portfolio WALE of 5.9 years).
The Trust’s capital structure (preferred gearing range 20 to 30 per
cent) takes into account the dynamics of the property investment
portfolio, and the lease terms of each asset. The Trust actively seeks
to diversify its sources of debt funding, currently through three
domestic banks and via the domestic medium term note market.
The Trust has a portfolio of 81 properties, limiting the financial
impact of vacancies or decline in rent for any particular property.
The key economic risk for the Trust relates to interest rate
movements, the impact of this on property capitalisation rates, and
the cost of debt funding. All investment proposals are evaluated in
relation to longer term return objectives, which take into account
interest rate cycles. The interest rate impact on debt funding is
managed with Board approved levels of interest rate hedging.
ENVIRONMENTAL RISKS
The geographic diversity of the Trust’s property portfolio limits its
exposure to periodic localised climate related environmental events,
such as flood and fire. The Trust undertakes detailed due diligence on
property acquisitions to fully understand levels of site contamination
prior to committing to purchase.
SOCIAL SUSTAINABILITY RISKS
The Trust recognises the significant importance of ensuring that
people’s health and safety is not put at risk by its activities and
operations. It has in place policies and practices to help identify
health and safety risks and to manage those risks appropriately.
The Trust does not consider there to be other specific social risks
to which it is exposed, but remains vigilant in terms of broader
retailing trends, and the business direction of its major customers.
BWP’s operations
Further information regarding the operations of the Trust is
included in the Outlook, Our property portfolio, and Sustainability
sections on pages 12 to 22.
MichaelWedgwood
Managing Director
BWP Management Limited
BWP Trust Annual Report 2016
11
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