Rob Ellis

Rob Ellis

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.

Cap Rates Keep Ratcheting Higher

Shopping centre transactions, which had started to gather some modest upwards momentum since the start of the year, virtually dried up as the Silicon Valley Bank and Credit Suisse both collapsed. Consequently, both the number and volume (sqm) of shopping centre transactions was lower in the first quarter of this year compared to a year earlier. Shopping centre cap rates have continued to edge higher across the whole spectrum of asset types, reaching their highest level since May 2016 according to The Data App estimates.

It Seems Some Shopping Centres Are A Low Risk Investment

Whilst the number of shopping centres changing hands has started to edge higher, they remain down for the three months to February compared to a year earlier, according to The Data App estimates. As in recent months, the volume (sqm) and value of transactions are also lower than a year ago. Clearly, part of the reason for the improvement in transactions is the increase in cap rates, which are close to 150 basis points higher than a year earlier.

Where To Now For Sub-Regional Shopping Centres

Sub regional shopping centres across Australia worth over $800 million failed to transact in 2023, highlighting the challenge determining the value of retail property assets amidst a challenging economic backdrop of high inflation, slowing retail spending, rising interest rates and an increasing cost of capital.

Cap Rates Move In On 7%, But Not All Cap Rates Are Equal

In the middle of last year shopping centre cap rates were averaging close to 5%, according to The Data App estimates. However, in the three months to January, cap rates were on the verge of 7%; an increase of close to 200 basis points. In spite of this pick-up in cap rates, the number of shopping centre transactions are around half those posted a year earlier. In value and volume (sqm) terms, the decline in shopping centres changing hands has been even more dramatic.

Cap Rate Jump Underpins Shopping Centre Transactions

Even though the final month of the year witnessed a flurry of shopping centre transactions, they remain well down on December 2021. Consequently, according to The Data App estimates, the number of shopping centre transactions in the three months to December more than half the number posted in a year earlier. Like December last year, transactions were domination by sub-regional centres changing hands although, this time around, cap rates are significantly higher; a feature which seems likely to persist.

Transactions Collapse – Risk Premium Too Low?

Shopping transactions in November were sparse, at best, meaning the three-month trend slowed further. According to The Data App estimates, the number of shopping centre transactions, in the three months to November, are around 30% of what they were a year earlier. In volume (sqm) and value terms, the decline is even greater. Meanwhile, cap rates which have risen from their sub 5%, level from the middle of the year; continue to hover around 6%.

Shopping Centre Transactions Remain Soft

By any measure shopping centre transactions are well down on last year and, as the year draws to a close, this profile is unlikely to change. According to The Data App estimates, the number, volume (sqm) and value of shopping centre transactions, in the three months to October, are over 50% lower compared to a year earlier. Meanwhile, cap rates have risen from their sub 5% level in June, continue to hover around the 6% level.