How Much Compensation for Investment Risk?

Whilst the number of shopping centre transactions edged higher in May, the trend remains a slowing trajectory. Also, in the three months to May, at a shade over 5%, cap rates hit a new cyclical low. The Data App estimate, in the three months to May, compared to a year earlier, the number, volume (sqm) and value of shopping centre transactions all moderated. It is increasingly apparent, after the surge in transactions last year, totalling $13.6bn in value, transactional activity is returning closer to historical levels.

While the number of shopping centres changing hands is slightly down on a year ago, in both volume (sqm) and value terms the decline is more dramatic. By implication, the average transaction value and gross lettable area is significantly smaller. The changing hands of smaller, lower priced assets reflects a polarisation towards more convivence based non-discretionary food retail outlets.

This feature is also captured in the fall in cap rates and the increase in the price paid per square metre, as transactions have become dominated by supermarket/everyday needs centres.

Real interest rates increased further in May, to reach their highest level since November 2014. At the same time, with transactions continuing to be dominated by everyday needs outlets, cap rates have trended to another cyclical low. As a result, the implied risk premium for commercial retail assets has hit an all-time low.

Put simply, investors are receiving little reward, compared to history, for acquiring a shopping centre asset.  Along with the higher cost of borrowing, this may help to account for the slowing in shopping centre transactions through the course of this year.

As noted previously, market pricing still points to interest rates along the curve rising. Should this eventuate, either investors will be required to accept a lower compensation for investment risk, or cap rates will need to rise.

Shopping centres transactions have continued to ease through the year, with neighbourhood / convenience centres making up the bulk of assets changing hands. With cap rates for these everyday needs centres hitting new lows, there is now little compensation for taking on the investment risk. On the other hand, the non-discretionary nature of everyday needs / food retailing, in a rising price environment, does provide compensation offset compared to other retail assets. Given the increasing valuation pressures, along with the tightening in credit conditions it seems retail transactions with continue their, more modest, trend.


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Other 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: for more information.