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Retail Property Sector – Under Pressure

Retail sector experiencing toughest environment since the GFC – challenges from subdued consumer spending, driven by low wage growth, coupled with an increase in online retail.
 

15th May 2019 / 5 mins read
Alastair McIntosh
Consultant
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This article looks at:

  • Performance of Australian institutional retail property sector;
  • Factors influencing the performance of the retail sector; and
  • Outlook for the sector.  
     

Retail Property Sector – Under Pressure

The Retail sector is currently experiencing its toughest environment since the GFC. Headwinds from subdued consumer spending, low wage growth and an increase in online retail are all converging factors creating a challenging environment for this sector. We believe these influences could continue for some time yet.

Fund-Weighted Annual Sector Returns – As at 31 March 2019

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The Gross Asset Value (GAV) of the Australian MSCI / IPD Retail Property Fund Index totals $32Bn, comprising funds managed by QIC, AMP, Lendlease, GPT and ISPT.

The Index includes Shopping Centres ranging from small Neighbourhood Convenience centres to large Super- Regional centres such as Westfield Doncaster and Highpoint in Melbourne and Westfield Miranda and Macquarie Centre in Sydney.

Australian Retail Market

Current Status

The Australian retail sector continues to face headwinds which has resulted in some asset re-valuations being written back over the past 6 – 9 months due to:

  • lower sales growth, 
  • negative rent reversions; and 
  • capitalisation rate expansion. 

The Sub Regional sector is feeling the most pain, with some assets seeing valuation declines of 10 – 15%. 

Super and Major Regional Shopping Centres and Neighbourhoods centres have not seen much decline.   There has been valuation write backs for specific assets depending on trading fundamentals, capex requirements or lease expiry profiles.  

Across the sector, landlords by necessity are having to undertake defensive capex to maintain the aesthetic appeal of their centres, sometimes without any accompanying income growth.  

Implications of Lendlease APPF Retail Liquidity Window 

  • The Lendlease APPF Retail Liquidity Window is likely to have an impact on the Australian Retail sector. 
  • The redemption payments within the next 2 years equate to $2.3Bn 
  • Lendlease is seeking a large offshore capital partner to take a large equity stake in the Fund. 
  • While there is capital waiting on the sidelines, no prime assets have traded, so pricing clarity is uncertain. 
  • Lendlease is putting a 50% interest in Westfield Marion in Adelaide on the market as a price discovery exercise. 
  • Westfield Marion is managed by Scentre Group (owns other 50%) and is ranked within the Top 10 Shopping Centres in Australia on a retail turnover basis.  
     

JANA Conclusions

Investment in the retail sector should be limited to the best retail assets – these centres are likely to be more resilient over the next decade. 

  • Want high sales productivity Super/Major Regional Shopping Centres that dominate a strong demographic catchment. These assets provide an opportunity for complementary property uses (eg. Office, residential etc); or
  • Convenient, highly productive neighbourhood centres with large fresh food and service offerings (eg. health, childcare and fitness.)

Stabilisation of valuations won’t occur until leasing spreads settle (will vary greatly depending on the asset) and the outlook for the Australian consumer turns positive. 

Possible that there will be little to no major transactional activity in Australia as superfunds are not desperate sellers particularly if price discovery is low.

Retail weightings across diversified property portfolios will be a key differentiator to returns in the medium term – the lower the weighting the better.