Rob Ellis

Rob Ellis

Some Green Shoots

The modest improvement in the number of shopping centre transactions recorded last month continues. As a consequence, transactions are well up on a year earlier, although this remains off a low base. Similarly, in the three months to November, the volume (sqm) and value of transactions, whilst modest by historical comparison, are up on a year earlier. Cap rates, even though quite erratic on a month-to-month basis, have gravitated around the 6.5% level; around 75 basis points higher than a year ago.

Cap Rates of 7%?

The last couple of months have witnessed a very modest upturn in shopping centre transactions, albeit from a very low base. Consequently, transactions are at the same level of year earlier. In spite of some large retail asset changing hands at the end of the month, both the volume and value of transactions are still well down on a year ago, reflecting the continuing bias towards smaller shopping centre outlets. Cap rates have posted large fluctuations in recent months, to be marginally higher than a year earlier, but are over 100 basis points up on the cyclical low recorded in June 22.

The Big AREIT Write-down.

A further $15 billion could be written off from the future values of Australia’s office and shopping centres assets, despite recent revaluations by Australia’s listed REITs.

Compared to asset write downs in the US and Europe, Australian listed property trusts posted only modest changes to capitalisation rates in the year to August 2023. Over the past 12 months, listed property owners have increased the cap rate of their office assets by 0.38% while, for shopping centres, cap rates have risen by 0.24%.

Why Cap Rates Are Too Low

Shopping centre transactions, despite edging up marginally in September, continue to meander along at a low rate. Whilst the number of transactions, in the three months to September is slightly down on a year earlier, the value and volume (sqm) are marginally higher. The Data App also estimates shopping centre cap rates are slightly lower than a year earlier although, given the small number of transactions, domination of small retail assets, this continues to make the accuracy of cap rates problematical.

Ample Supply, But Little Demand

It continues to be the case very few shopping centres are changing hands. The Data App estimates the number of shopping centre transactions is the three months to August is over 60% lower than a year earlier. Consequently, both the volume (sqm) and value of shopping centre transactions are well down on a year earlier. The dearth of transactions makes the accuracy of cap rates particularly difficult, especially since these have been dominated by the non-discretionary, supermarket dominated, small retail assets.

Shopping Centres Left On The Shelf

The number of shopping centres changing hands continues to dwindle. According to The Data App estimates, in the three months to July, the number of shopping centres transacted was less than half that recorded the same time last year. Needless to say, the volume (sqm) and value were also well down on a year earlier. The continuing dearth of transactions makes the accuracy of cap rates difficult, especially since the bulk of recent activity have been for smaller, lower yielding, retail outlets.

Shops Not Selling

The number of shopping centre transactions remains at a low ebb. In the first six months of this year, less than half the number of shopping centres changed hands compared to the same period a year earlier. Consequently, the volume (sqm) and value were also well down on a year earlier. The sparseness of transactions makes the current accuracy of cap rates more problematical. Even so, it seems reasonable to conclude, overall cap rates have increased by a shade under 200 basis points from their cyclical low. Continuing the trend, cap rates for smaller, everyday needs shopping centres, while having increased, remain well below those for larger destination shopping centres.

Shopping Centre Transactions Continue to Flounder

The number of shopping centre transactions continued to flounder in the three months to May, while the volume (sqm) and value of transactions, while stronger, have been boosted by some large assets changing hands. The low number of transactions is against a backdrop of cap rates now above 7%; up over 200 basis points on a year earlier. However, not all asset types have performed the same, with higher cap rates continuing to be associated with bigger, destination type, shopping centres.

Housing Affordability Will Structurally Deteriorate

After dipping down, property prices now appear to have stabilised and, along with rising mortgage rates, cost-of-living pressures and a surge in migration, housing affordability has again become a key issue. Nowhere more so than Sydney, continually recognised as one of the most unaffordable cities in the world.
Housing affordability is not a recent issue, from the beginning of the twentieth century, up until the end of 1986, roughly six months of annual personal income was the benchmark for a 10% housing deposit. This figure is currently around 16 months. So, despite a decline in property prices, entering the Sydney housing market has, through time, become increasingly onerous.