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1 m3commentary SHOPPING CENTRES Autumn 2018 Key Research Contacts: Jennifer Williams National Director NSW (02) Katherine Tambouras Research Analyst NSW (02) Amita Mehrotra Research Director VIC (03) Casey Robinson Research Manager QLD (07) Zoe Haskett Research Manager SA (08) m3property.com.au P1

2 CONTENTS Market Overview 3 Key Retail Influences 4 Occupier Demand 5 Key Indicators 7 Retail in focus 9 Significant sales 10 Outlook 11 CHANGING THE RETAIL MIX Retail trade growth, while having slowed, was positive over the year to February 2018 compared to the year prior. For the year-ending February 2017 to the yearending February 2018 all sectors experienced growth except Department stores which experienced a fall in turnover of 0.2%. The strongest growth was recorded in the Cafes, restaurants and takeaway sector (3.7%). Consumer sentiment, as measured by the Westpac Melbourne Institute, has improved and as at February was positive. DEFINITIONS Regional: Major shopping centre typically incorporating at least one full line department store, a full line discount department store, a supermarket and around 100 specialty stores. GLA is over 30,000m 2. Includes Super Regional, Major Regional and Regional centres. Sub Regional: A shopping centre generally incorporating at least one full line discount department store, a major supermarket and around 40 specialty stores. GLA typically 10,000-30,000m 2. Neighbourhood: Local shopping centre generally containing a supermarket and specialty stores. GLA typically less than 10,000 square metres. FY Financial Year Specialty rentals in the major A-REIT owned centres increased by 4.1% over the year to December Sale transaction activity has increased over the 12 months to March 2018, compared to the year prior. Regional, Sub Regional and Neighbourhood centre transactions over the year to March 2018 totalled $5,364,005,000. This compares to $3,845,391,000 worth of sales reported the year prior. Investment yields across prime retail centres continued to tighten over the year to December Further yield tightening is expected to taper off with bond rates rising and continued challenges hampering income growth in the sector. We anticipate activity to continue to be strong over 2018 with many institutional owners divesting assets to maximise portfolio returns. m3commentary Autumn 2018 P2

3 MARKET OVERVIEW The retail sector continues to face challenges such as changing consumer preferences, weak consumer sentiment, technological changes and rising bond rates. Low interest rates have kept purchaser demand positive, but with rising bond rates investment markets are considered near their peak. Landlords are responding by altering their retail mix to include more food and beverage based retailers, health and beauty and services, which are the groups performing well in the changing consumer environment. The m3property Shopping Centre report focuses on retailer and investment activity in Regional, Sub Regional and Neighbourhood centres in Australia. Shopping centre tenant demand drivers have shown mixed results over recent years with sentiment being volatile and largely weak, online retail expanding, wages growth being low and residential construction varying widely between regions. On the positive side, population growth has improved since the end of 2015 and employment growth has been strong. Overall the outcome has been a slight slowdown in retail trade. Retail conditions are expected to be challenging in most states over the short-term, with outcomes relying on population growth, employment levels, wages growth and combating future issues, such as online competition and new entrants into the market. The government is introducing a 10% tariff on clothing, electronics and furniture under $1,000 in value purchased online from overseas retailers from July 1, 2018, aimed at equalling the playing field. In practice, additional governance may be required to ensure a positive impact on local retailers. Rental growth in specialty stores of A-REIT owned centres was 4.1% over the year to December 2017, this was an improvement in growth compared to the previous 12 months. Consequently gross occupancy costs rose slightly to 14.4% in December 2017, from 14.1% as at December Investment demand was positive with the volume of sales increasing over the year to March 2018 compared to the year prior in Regional and Neighbourhood centres, compared to the year prior. Sub Regional centres saw activity reduce over the same period. Yields for shopping centres reported across the major retail A-REITs firmed by 27 basis points over the year to December 2017 to average 5.66%. m3property Valuation Left: Marrickville Metro SC, NSW. Top: Canelands Central, QLD. Lower: Rouse Hill Town Centre, NSW. m3commentary Autumn 2018 P3

4 KEY INFLUENCES ECONOMY $ Momentum appears to be gathering in the Australian economy s transition away from growth driven by investment in the mining and resources sector towards other sectors such as property, tourism and education. Growth continues to improve in states like New South Wales (NSW) and Victoria and while challenges remain, conditions in parts of Western Australia (WA), Queensland and Northern Territory (NT) are also starting to improve. According to the Australian Treasury Budget Papers, in real terms Gross Domestic Product is forecast to grow by 2.75% in and improve to 3.0% in RETAIL SECTORAL CHANGES The retail sector continues to experience major changes as demanded by consumer behaviour and new shopping trends/technologies. The changes are resulting in regional variations in spending and a transformation in the way we purchase goods and services. These influences are likely to continue to drive regional differences in retail growth over the short- to medium-term. The expansion of Amazon in Australia is likely to result in further evolution of the retail sector in Australia over the short- to medium-term. CONSUMER CONFIDENCE The Westpac-Melbourne Institute Index of Consumer Sentiment was positive in February 2018 but lower than the January 2018 result. The index is currently at in February, above a net balance of 100 (meaning optimists outweigh pessimists). The decrease reported in the February survey is likely to be a result of concerns regarding volatility of global share markets. RETAIL BUILDING APPROVALS Nationally, over the past year we have seen retail building approvals remain largely stable with a slight increase of 0.7% recorded over the 12 months to January 2018 in comparison to the year prior. The year to January 17 had seen a strong increase of 13.6% compared to the year prior. Retail development activity is still expected to remain robust in the short-term due to approvals from 2017 which are still to be actioned. POPULATION Moderate population growth continues to underpin the retail sector despite volatile consumer sentiment and low wages growth. Australia s Estimated Resident Population (ERP) as at 30 September 2017 was 24,702,900 people reflecting an annual increase of 395,600 (1.6%). The fastest population growth in the year to June 2017 was Victoria (2.4%), followed by ACT (1.8%), Queensland (1.7%) and NSW (1.6%). RETAIL TURNOVER National retail turnover, in current prices (seasonally adjusted), during February 2018 was approximately $26,449,900,000 according to the ABS (April 2018). The total turnover increased over the month of February (0.6%). Total retail spending growth for the year-ending February 2017 to the year-ending February 2018 was 2.7%, decreasing from 3.3% growth in the year-ending February 2016 to the year-ending February For the year-ending February 2017 to the year-ending February 2018 all sectors experienced growth except Department stores which fell by 0.2%. The strongest growth was recorded in the Cafés, restaurants and takeaway food services retailing category (3.7%). m3commentary Autumn 2018 P4

5 OCCUPIER DEMAND DEPARTMENT STORES Annual retail trade in department stores fell by 0.2% over the year to February 2018, compared to the year prior, with the past quarter to February 2018 seeing a stabilisation in retail trade in this retail group. Myer s sales declined by 1.4% over 2017 compared to the year prior. It closed three stores and handed back space in two stores over 2017 bringing back comparable sales to a decline of 0.2% over the year. Myer continues to hand back space and announced they will be closing stores at Colonnades, SA (now closed), Westfield Belconnen, ACT, and Westfield Hornsby, NSW. This issue will be explored further in the retail in focus section. David Jones sales increased by 1.0% with comparable sales (excluding the Dick Smith Concessions) declined by 0.7%. David Jones actually increased their footprint with three stores added in David Jones are continuing to focus on their food offering. David Jones opened Westfield Bondi Junction, GPT Group s Wollongong Central and Melbourne s Bourke Street David Jones Food Halls in The next offering was Malvern Central, in southeast Melbourne, which opened in March David Jones are now planning to open their first stand alone food store in 2019 at Capital Grand, South Yarra, Victoria. In the year ended December 2017 Kmart s comparable store sales grew 5.4%. Kmart expanded its store network over the year to total 225 stores as at December. Five new stores were opened. A further 11 major refurbishments were completed over the period. Wesfarmers plan to continue to invest in the Kmart store network through refurbishments and new stores (including the conversion of a Target store over 2018). Target saw comparable store sales decrease by 6.5% over Target opened six stores over 2017 and closed two. Target have therefore increased their network to 307 stores. Target continues to focus on reducing expenses. BIG W witnessed a rise in comparable sales of 1.3% in the year to December BIG W management is continuing to implement a new strategic plan for the chain based on rebuilding of customer trust on price and enhancing customer experience. At December 2017 BIG W had 186 stores with two thirds of their network (121 stores) having completed a light store refresh. Over the past year one store was added. No new stores are planned for the next six months. Debenhams opened in Melbourne CBD over 2017 and plans to roll out to other capitals, which will add competition to both the department and discount department stores as it is considered mid-market. MINI-MAJORS The mini-major segment is defined as retailers who occupy space ranging from 400 to 1,500 square metres within a shopping centre. Although traditionally dominated by Australian retailers such as JB HI-FI and Rebel Sport, international brands have become major players in the mini-majors segment. A number of international brands such as Zara, H&M, Uniqlo, are currently in an expansion phase, focusing their attention towards centres located along the eastern seaboard. Competition in this segment is expected to continue to come largely from overseas including Decathlon, a French sporting goods and active wear retailer who opened a store in Tempe, NSW in Amazon is also set to challenge retailers in this component of the market. m3property Valuation: Valley Plaza, Green Valley, NSW. DISCOUNT STORES DEPARTMENT Discount department stores (DDS) include Kmart, BIG W and Target. This retailer segment competes largely on price and has benefited from the shift in consumer preferences for low-cost goods. In particular, Kmart continues to perform well due to this shift. m3commentary Autumn 2018 P5

6 OCCUPIER DEMAND SUPERMARKETS Woolworths Ltd (Woolworths and Woolworths Metro) (37.2%), Wesfarmers Limited (Coles) (30.3%), ALDI Stores Supermarkets Pty Ltd (9.2%) and Metcash Limited (IGA, Supa IGA, IGA X-press, IGA Fresh, Foodland and Friendly Grocer) (7.4%) are the major supermarket chains operating in the competitive food and grocery market (IBISWorld February 2018). Other independent supermarket chains include: Australian United Retailers Limited (Foodworks), SPAR Australia Limited, Costco Wholesale Australia Pty Ltd, Harris Farm, Tong Li. Wesfarmers reported positive comparable sales growth for Coles food and liquor in the second half of 2017 (0.9%). Coles expanded and invested in its supermarket network during the six-month period, with 14 supermarkets opened and 35 renewals completed. As at 31 December 2017, Coles had a total of 806 supermarkets. Woolworths reported strong comparable sales growth for Australian Food of 4.9% for the second half of Woolworths had 1,008 supermarkets in Australia as at December 2017 having opened net 10 supermarkets including one Metro store. A further 37 renewals and 35 upgrades were completed over the December half Woolworths plan to open a further stores each year over the next 3-5 years. From opening its first Australian store in 2001 in NSW, ALDI now has an estimated 9.2% market share and over 500 stores nationally according to IBISWorld, (February 2018). ALDI s revenue is expected to reach an estimated $9,400,000,000 in the 2018 calendar year, which would represent a rise of 10.6% compared to the 2017 estimated total of $8,500,000,000 (IBISWorld February 2018). ALDI is expected to remain a major driver of supermarket competition going forward. IGA and Supa IGA, owned by Metcash, have lost significant market share over the past five-years due to robust competition. It was estimated that Metcash Limited s supermarket sales increased 1.3% to $7,650,000,000 in but were down 0.6% on a like-for-like basis compared to the year prior (IBISWorld, February 2018). Metcash operates over 1,683 stores nationally, after 32 new stores were opened over the 2017 financial year. Metcash s IGA segment has a 7.4% market share in Australia according to IBISWorld (February 2018). There were 397 Super IGAs, 823 IGAs and 206 IGA-Xpress at June 2017 and a further 257 Friendly Grocer/Eziway stores, according to the Metcash Limited Annual Report SPECIALTY STORES The entrance of new retailers or expansion of existing retailers has offset the loss of some specialty retailers over 2016 and into 2017, keeping vacancies low. Recently. retailers such as Cartridge World, Nine West, Baby Bounce, Maggie T, Doughnut Time, Specialty Fashion Group and Zachary the Label became insolvent, went into administration or started closing stores. On the other hand, specialty stores such as Burger Project, Decjuba, Hairhouse Warehouse, Lord of the Fries, Dyson, J Crew, COS and Freshii plan to expand or set up operations in Australia. Growth in the online retail sector and the continuing expansion of Amazon in Australia is resulting in centre owners changing their tenant mix. The pattern of rationalisation of fashion and expansion of health and beauty, services, food-based retailing and entertainment appears to be a continuing trend in The food and beverage (F&B) category has recorded strong sales growth over the past 10-years recording an annual average growth rate of 6.1% per annum. Landlords have realised the importance of creating a stronger F&B offer to achieve a higher F&B strike rate (the frequency of utilisation of the F&B component) and in turn higher rental and asset value. F&B tenants now occupy 10% of GLA and are becoming a second anchor for many developments. m3property Valuation: Paradise Centre, Surfers Paradise, QLD. m3commentary Autumn 2018 P6

7 Billions ($) 2.9% 2.7% 2.6% 2.9% 3.5% 3.6% 3.3% 3.3% 3.7% 4.1% Vacancy rate (%) m3property Research KEY INDICATORS 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Retail A-REIT Australian vacancy rate Source: Annual A-REIT reports and presentations and m3property (March 2018) VACANCY The average reported vacancy rate for the major retail A- REIT owned centres was 0.9% as at December 2017, up slightly from 0.84% in December While the overall fairly stable trend in vacancy is likely to be the same, centres owned by the major A-REITs are typically core assets that are actively managed and the broader market vacancy is, therefore, likely to be higher. The vacancy has largely been flat over the past six-months on the back of the increased F&B offering in many A-REIT owned centres. Retail Centre Rental Growth Source: Annual A-REIT reports and presentations and m3property (March 2018) RENTS Annual rental growth averaged 4.1% across the major shopping centres, owned by A-REITs in Australia over This represented an increase from 3.3% over the year prior. The majority of growth appears to be coming from centres increasing their focus towards food-based retailing. The reduction in Department store size and some stores exiting centres is likely to have a mixed impact on rents in the short-term. Some centres may benefit from the increase in higher paying specialty stores, whereas others may see an extended period of decreased rent until refurbishments are completed and new tenants sourced. Retail Sales Volume, by Centre Type 7.0 Regional Sub Regional Neighbourhood Source: m3property Research (*At end March 2018). Sales over $5 million INVESTMENT DEMAND Shopping centre sales volume lifted over the year to March 2018 to be $5,364,005,000. Sales activity rose for Regional and Neighbourhood centres, with Sub Regional centre activity slowing. For Regional centres this followed two weak years where stock was tightly held. Neighbourhood centres are benefiting from demand for convenience centres. Over the year to March 2018, unlisted funds accounted for the majority of shopping centre purchases (49.9%), followed by overseas investors (13.8%). AMP Capital, GPT Group and GIC accounted for the largest volume of centre sales over the year to March Shopping centre sales activity was dominated by the three most populous States over the year with Queensland accounting for 42.2% of sales, NSW (30.9%) and Victoria (16.9%). Supply of centres on the market lifted in recent months with centres, or part shares of centres, for sale at Gateway Plaza Leopold and Highlands Shopping Centre in Victoria; The Strand at Coolangatta and Goldfields Plaza, Gympie in Queensland; Kelmscott Plaza in WA and Lidcombe Centre in NSW, among other assets. m3commentary Autumn 2018 P7

8 Average market yield (%) Prime (prime and super prime) IRRs (%) m3property Research KEY INDICATORS INVESTMENT YIELDS INTERNAL RATES OF RETURN 10.00% Shopping Centre Market Yields 8.50% Shopping Centre Prime IRRs 8.00% 8.00% 6.00% 7.50% 4.00% 7.00% 2.00% 0.00% Regional centres Sub Regional centres Neighbourhood centres 6.50% 6.00% Regional Neighbourhood Sub Regional Source: m3property Research Source: m3property Research Centre type Prime Cap Rates Q1/18 12 month outlook Secondary Cap Rates Q1/18 12 month outlook Prime IRRs Q1/18 12 month outlook Secondary IRRs Q1/18 12 month outlook Regional 4.00%-5.25% Stable 5.25%-6.50% bp 6.25%-7.00% Stable 7.00%-7.50% bp Sub Regional 5.00%-6.25% Stable 6.25%-7.25% bp 6.50%-7.25% Stable 7.25%-8.00% bp Neighbourhood 5.00%-6.50% Stable 6.50%-7.50% bp 6.50%-7.50% Stable 7.50%-8.00% bp Investment demand for shopping centres is positive and supply of centres on the market has increased. The tightening of Regional centre yields was largely driven by market evidence, with three major sales occurring over the past 12 months providing solid evidence of where the market is performing at current. Looking forward, while Prime centres are likely to stabilise over the short-term, Secondary centres are likely to see yields/irrs soften. m3property Valuation: Central West, Braybrook, VIC. For Sale: Lidcombe Centre, NSW. m3commentary Autumn 2018 P8

9 RETAIL IN FOCUS CONVENIENCE DRIVES NEW RETAIL The changing Australian lifestyle including increasing density of the urban landscape, reduced passenger vehicle ownership, down 0.1% over the year to January 2017 (ABS latest survey), increased demand for convenience from time-poor consumers and increased competition from mixed-use developments and online retail is driving a changing retail environment. In order to meet the challenges, landlords are now thinking outside the square. While changing tenancy mixes (to include more services, food and beverage and entertainment) and improving access to centres to increase convenience is seeing positive results, some landlords are going to greater steps to ensure they maintain a strong customer base. m3property Strategists track development applications from landlords and have noticed an increase in applications from retail landlords with other sector uses. These include: childcare centres, medical centres, hotels, large format retailers and residential. These new retail precincts/mixed use developments provide several advantages to landlords. Residential components supply a new customer base, hotels, medical, large format retail and child care centres provide convenience for customers and raise footfall. Examples of centres incorporating residential include: East Village, Top Ryde and Pacific Square in NSW and Coorparoo Square, Queensland. Future examples include: Macquarie Centre, NSW, which has approval for offices, hotels, serviced apartments and residential. The Glen Shopping Centre, Glen Waverley, Victoria has approval for the inclusion of over 500 units. Meriton s Green Square development, NSW includes residential units, retail, a multipurpose function facility gym, swimming pool and theatre. Melbourne Central, Chadstone and Northlands in Victoria, Indooroopilly Shopping Centre, Queensland and Rouse Hill and Eastlakes in NSW are also expected to incorporate residential space. Shopping centre owners such as Stockland, ISPT, Mirvac, Scentre, GPT and Meriton are considering alternative uses to maximize returns. DEPARTMENT STORES AND SPACE HANDBACKS Department stores have faced difficult trading conditions over recent years. Department store trade has reduced by 0.2% over the year to February 2018 and 0.9% over the year to February 2017, compared to the previous respective years. While the decline in trade is slowing, department stores continue to focus on improving their performance. To this end, both Myer and David Jones have become more selective in the centres they trade within and continue to downsize. Myer, for example, handed back space in Warringah and closed Brookside and Orange in From 2018 it is handing back space in Cairns, Dubbo, Blacktown and Castle Hill and exiting Colonnades (closed), Logan, Belconnen and Hornsby. Many landlords are seeing this as an opportunity to bring in new anchor tenants and/or incorporate food halls or entertainment components to their centres. In Orange City Centre, Harris Scarfe is being considered to take a large proportion of the almost 7,000 square metres vacated by Myer and the plan is to also incorporate a mini-major and various specialty shops. The benefit is potentially higher income to owners. However, there may be risks including: Precinct issues linked to tenancy mix, Tenancy agreements may have restrictive clauses regarding loss of anchor tenants, resulting in reduced rents or tenants being able to exit leases, and Capital expenditure for reconfiguration of single tenancy into multiple tenancies. Development: Eastlakes Shopping Centre, NSW. m3commentary Autumn 2018 P9

10 SIGNIFICANT SALES TO DATE Property Date Price Market Yield Centre Type Purchaser Kawana Shoppingworld (50%) QLD Dec 17 $186,000, % Sub Regional ISPT Churchill Centre North, Kilburn (50%), SA Dec 17 $42,500, % Sub Regional Churchill Centre North Investment Trust 1 Toormina Gardens Shopping Centre, NSW Dec 17 $83,300, % Sub Regional Fort Street Real Estate Capital Fund III Woodcroft Shopping Centre, NSW Dec 17 $43,850, % Neighbourhood Undisclosed Indooroopilly Shopping Centre (50%), QLD Nov 17 $802,500, % Super Regional AMP Capital (ASCF and ADPF) Rockingham Shopping Centre (50%), WA Nov 17 $600,000, % Regional AMP Capital Bathurst City Centre, NSW Oct 17 $71,150, % Neighbourhood QIC Stockland Corrimal, NSW Oct 17 $69,250, % Neighbourhood Lederer Group Benowa Village, QLD Oct 17 $49,500, % Neighbourhood Overseas Investor Port Pirie Plaza, SA Sep 17 $32,050, % Sub Regional Primewest Lakeside Square, Pakenham VIC Jul 17 $30,380, % Neighbourhood Private Investor Marketown East, Newcastle West, NSW Jul 17 $95,250, % Sub Regional Sunsuper (AMP Capital) Marketown West, Newcastle West, NSW Jul 17 $68,000, % Neighbourhood Sunsuper (AMP Capital) Highpoint Shopping Centre, Maribyrnong (25%), VIC Please contact one of our Retail Valuers for detailed sales analyses. Jul 17 $660,000, % Regional GPT Group m3property: Left: Sale Rockingham City Shopping Centre WA. Right Top: Valuation Churchill Centre, Kilburn, SA. Right Bottom: Valuation Mitcham Square Shopping Centre. m3commentary Autumn 2018 P10

11 OUTLOOK SHOPPING CENTRES Retail floor-space supply is set to increase over 2018, given high levels of building approvals, ongoing redevelopment and repositioning of assets. Supply is, however, likely to slow over the medium term. The Federal Government is forecasting household consumption to grow by 3.0% in (Mid-Year Economic and Fiscal Outlook, Budget ) due to the combination of low interest rates and population growth being tempered by weak wages growth and slowing dwelling price growth. With low interest rates continuing, an expected lower Australian dollar and a gradual transition to non-mining sectors, stronger consumer confidence is expected. Westpac-Melbourne Institute s measure of consumer confidence has improved over 2018 to date, with pessimists outweighing optimists at each of the monthly survey s completed this year. In terms of tenants in retail centres in Australia, demand is likely to continue to be strong for health and beauty services and F&B based retailers over This is likely to continue to be at the expense of fashion retailers and department stores. Centre owners are likely to continue to adjust their retail mix in the face of changing consumer preferences and Amazon s expansion in Australia. Retail yields are likely to be fairly stable for prime stock and continue to soften for secondary stock. KEY RETAIL VALUATION CONTACTS Heath Crampton National Director NSW (02) Shaun O Sullivan Director VIC (03) Ross Perkins Managing Director QLD (07) Simon Hickin Director SA (08) m3property provides national coverage in all States and Territories. DISCLAIMER m3property Strategists Australia. Liability limited by a scheme approved under Professional Standards Legislation This report is for information purposes only and has been derived, in part, from sources other than m3property Strategists and does not constitute advice. In passing on this information, m3property Strategists makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information available to m3property Strategists at that time and contains assumptions, which may be incorrect. m3property Strategists makes no representation that any such statements are, or will be, accurate. Any unauthorised use or redistribution of part, or all, of this report is prohibited.