Structural changes continue to throw up challenges
The retail property market continues to face challenging conditions. On top of weak retail turnover growth structural changes to consumer spending patterns are arising at the detriment of existing retail centres and strips. In particular, the trend away from buying ‘things’ towards paying for experiences – such as eating out, entertainment and travel – and the rise of online shopping are creating headaches for retail landlords.
A shift in consumer habits
We expect retail turnover growth to trend slightly higher over the three years to June 2021, however, it will remain weak in an historical context. The underlying fundamentals for consumers remain challenging: jobs growth has slowed this year, real wages are forecast to remain sluggish and house prices declines are set to continue. Further reason for the subdued outlook is the likely continued trend towards a lower proportion of household spending being directed to retail goods as housing costs, education, travel and medical costs snare an increased share of the budget. Partially offsetting these drags on retail turnover, the competitive AUD should generate positive net tourist spending.
Online spending continues to rise
Shopping centres and strip shops operate in an environment where not only is retail turnover growth muted, but online shopping is making further inroads year by year. Amazon’s expansion in Australia appears to have jolted domestic retailers into giving renewed attention to their online offerings and service. The share of online retailing is around 8.5% of total turnover and is growing at over 15% per annum.
Retail building remains robust
Retail building activity remains robust despite the challenging demand-side conditions. A perusal of recent projects and those in the pipeline reveals the prevalence of entertainment and dining precincts being added to centres to cater to increased consumer spending in these areas and as a means of defending against the threat from the internet. In a further effort to broaden the tenancy base and pulling power of centres, they are including medical centres, child care facilities, gyms, co-working offices and other uses within their envelopes.
Rents remain flat
The interplay of constrained demand and robust supply means that specialty shop face rents have been more or less flat over the last year in current price terms, with leasing incentives drifting up or at best holding steady. Shopping centre net incomes show somewhat stronger growth due to the preponderance of fixed annual rental escalations. Even so, AREIT results show that negative leasing spreads are having an impact.
Investors continue to chase assets
As in other property sectors, any weakness in leasing markets seems to be discounted by investors as they continue to chase assets. The value of retail transactions reached a new record level of over $10 billion in FY2018. However, for every buyer there is a seller, and FY2018 was notable in the number of (stakes in) regional shopping centres sold. Traditionally, these large retail assets are very tightly held.
Opportune time to divest
Concerns about the retail outlook are starting to become apparent in retail investment yields. While there was further firming of yields overall, it was mainly in the regional centre class, perhaps reflecting the greater number of sales after some years of very little opportunity to acquire major assets. Yields are expected to remain firm near term but are at the risk of softening as bond rates rise. Whether or not this translates into falls in centre values will depend on the degree of movement in yields as well as any offsetting effect from centre income growth. Those buying now with a long term horizon should take this into account. For those looking to divest, acting sooner rather than later would capitalise on the opportunity to achieve a high price while mitigating against the risk of falling prices.
PR & Communications Manager
M 0427 916 020