Neighbourhood centres are being priced more sharply than sub-regional malls, as investors prize more highly the income from non-discretionary retail, according to a CBRE report.
The extended analysis covering the main classes of shopping malls – neighbourhood centres, sub-regional malls and regional shopping centres – found sub-regional centres have suffered the most due to inconsistent sales growth delivered by two of the country’s three main discount department stores.
“This impacts sub-regional shopping centres the most because one-fifth of centre turnover is generated by discount department stores, which don’t feature at all in neighbourhood shopping centres and represent closer to one-tenth of the turnover derived by regional shopping centres,” said CBRE’s head of research in Australia, Bradley Speers.
“This turnover risk is being reflected in investor pricing. Our analysis indicates that neighbourhood shopping centres – underpinned by their relatively secure income profile, which focuses on food and convenience – are now being priced more sharply than sub-regional centres, which is a historical anomaly.
“Meanwhile, larger landlords are heavily investing capital into regional shopping centres to ensure their ongoing allure to shoppers.”
Cap rate compression from June 2015 to June 2018 contributed 10.4 per cent to value growth for sub-regional centres, compared with 11.9 per cent for regional centres and 14 per cent for neighbourhood centres, according to the CBRE analysis.
The wariness around sub-regional centres was evident in the recent sale by Vicinity of a $573 million portfolio of poorer-performing shopping centres to SCA Property Group on an initial yield of 7.47 per cent.
Where investors are more confident with a mall’s performance, tighter yields are being struck, such as the recent acquisition of Burwood One in Melbourne for more than $180 million on a yield of 5 per cent or below.
The analysis raises the question of whether better returns could be gained from the space occupied by discount department stores, which accounts for about one-quarter of total floor space in sub-regional malls.
The gross rent such tenants generate per square metre is about 15 per cent of that produced by specialty shops, according to CBRE’s associate director for retail investments Nick Willis.
“While some sub-regional shopping centres may be faced with discount department stores either vacating or shrinking their footprint, this presents an opportunity to landlords to redefine their asset as a centre for service, convenience or entertainment,” Mr Willis said.
The proportion of services in sub-regional shopping centres will double within five years to account for about 25 per cent of total space, according to the report.