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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.
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Retail Property Sector – Under PressureThe 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
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 MarketCurrent StatusThe 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:
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
JANA ConclusionsInvestment in the retail sector should be limited to the best retail assets – these centres are likely to be more resilient over the next decade.
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.
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