The number of shopping centre transactions continues to fall away, while cap rates have risen sharply. Last year recorded a surge in shopping centre transactions and some slowdown was inevitable. However, shopping centre activity has now slowed to a crawl, with The Data App estimating, in the three months to September activity, however measured is down over 50% on a year earlier. Meanwhile, cap rates continue to rise.
According to The Date App estimates, it now appears shopping centre cap rates hit a cyclical low of a shade under 5% in June this year. Within three months cap rates have risen by around 120 basis points.
Analysis carried out with Damian Stone, under the Par Group umbrella, http://par.group/retail-cap-rates-to-rise-but-not-uniformly/ suggested cap rates could exceed 6%, but this could take a year to come to fruition. The reason why the cap rate expansion has been more abrupt, based on the estimated equation, is because both real interest rates and inflation have turned up more sharply than used in the analysis.
With inflationary pressures still apparent, boosted by higher fuel prices, the cost of finance continuing to tick up and real interest rates globally moving higher, the bias to cap rates seems heavily biased on the upside.
Looked at from a different perspective, while cap rates have risen over the past year, the amount to compensation investors receive for taking risk has fallen more abruptly. Either investors need to be prepared to accept historically low investment returns, or cap rates will need to rise further.
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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:
About PAR Group
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.