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 number of shopping centre transactions, whilst off of their cyclical low, are bumping along at a level last experienced during depths of Covid pandemic, when the degree of uncertainty about any future was certainly high. The current lack of shopping centre transactions is clearly more about price, than any notion of retail spending uncertainty.
As for the outlook, the pressures on transactions are continuing to intensify. No only are interest rates on the rise there is a growing perception the cash rate will need to stay higher for longer in order to bring inflation to within its target range. Partly as a consequence of this, ten-year government bond yields are currently touching 5% for the first time since mid-2011. Needless to say, this will increase borrowing costs across the spectrum, including for shopping centres, and shrink the investing universe.
Just as nominal bond yields have increased, so has the guaranteed real return from government indexed linked bonds. In the three months to October cap rates have averaged in the region of 6.25% and real yields a shade under 2%. Consequently, the implied risk premium, averaged across all commercial retail assets is close to 4.5%; remaining well below its long-run trend.
Simply, the increased cost of funding and historically low implied risk premium both point to the need for cap rates to rise for a meaningful pick-up in transactions. Clearly, due to the mix of assets transacted there are cyclical swings in cap rates but, with the risk premium mean reverting would imply cap rates in excess of 7%.
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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.