Even though the number of shopping centre transactions nudged up again in June, the trend continues to moderate. According to The Data App estimates, in the three months to June, the number, volume and value of shopping centre transactions are all well down on a year ago. Cap rates also hit another new cyclical low, going under 5% for the first time.
Last year shopping centre transactions boomed, as the value of transactions exceeded $13 billion; virtually double the historical average. This market buoyancy reflected, in part, portfolio rebalancing, with the sale / offloading of large shopping centres on the one hand, as they became adversely impacted by both an increase in working from home and on-line shopping while, on the other hand, there was a strengthening in demand for more local, smaller, convenience type outlet with a more stable income stream.
Indeed, while the number of transactions is down 20% on a year earlier, the volume of space (sqm) is close to 50% lower. It has been this increasing bias towards smaller retail outlets which has contributed to recent drop in cap rates to a new historical low.
With real interest rates moving still higher in June, the implied risk premium for commercial retail assets has hit a new all-time low. So, shopping centre investors are being paid an historically small compensation for taking on the investment risk.
It is quite conceivable investors are prepared to accept this lower level of risk compensation but, more than likely, shopping centre cap rates are at, or close to, their inflexion point, with the case for higher cap rates becoming increasingly compelling.
If market pricing and expectations are to be believed, interest rates along the curve, as well as the rate of inflation looks set to increase. Estimation work, done under the Par Group umbrella and simply applying consensus expectations, suggests this cocktail is ideal for cap rates to pick up. Clearly, how much cap rates move will not only depend on the profile of the equation inputs, but a host of other considerations.
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Further research undertaken by the http://PAR.Group/ on the impact of the pandemic and e-commerce on shopping centres refer to the links below:
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The Data App (TDA) is a member of the PAR Group, an independent research collective offering a comprehensive range of property research and analytical services. The team is experienced in economics, property research, transactional and corporate strategy; all with extensive industry involvement in both the property and finance sectors. Visit: http://par.group/ for more information.