The modest increase in shopping centre transactions, posted towards the end of last year, was sustained at the start of 2024. Consequently, transactions, in the three months to January, are marginally higher than a year earlier. The volume (sqm) and value of transactions remain slightly lower than a year earlier. The low number of transactions has contributed to cap rates being volatile on a month-to-month basis, continuing to oscillate between 6% to 7%.
As for the economic backdrop, the well-documented long and variable lags between changes in monetary policy and economic activity, means there is a fair chance economic the headwinds of past increases in interest rates will impact on consumer behaviour for some time yet; particularly given the unwinding of fixed interest rate mortgages. This would point to discretionary spending feeling more of the brunt of any spending squeeze. So, from a cyclical perspective, shopping centres dominated by food retailing are likely to prove more resilient in the short term.
However, this will not persist. With the rate of inflation now tumbling, financial markets are now pricing in cuts to interest rates through the year. Should this materialise, it is likely to herald an improvement in discretionary spending and, with it, a stronger backdrop for larger shopping centres.
After hitting a cyclical low, of a shade over 5%, in June 2022, cap rates have trended up to around the 6.5% currently. Even so, cap rates have bounced around on a month-to-month basis due to the type of shopping centre transacted and the small sample size. The implied shopping centre risk premium is currently around 4.5%, compared to a long run average of 5.8%. The implication being shopping centres as an asset are less risky now than have generally been in the past; which may well be true. However, simple applying the historical risk premium would imply shopping centre cap rates of closer to 7.5%. The alternative rationale is shopping investors are prepared to accept a lower level of compensation, compared to the past, for taking on the investment risk.
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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.