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. Cap rates for smaller, everyday needs types of shopping outlets, while they have also increased over the past year, still remain low by historical standards.
Clearly, the transition to higher cap rates while, more recently, the ability to raise capital, has weighed on shopping centre transactions. With cap rates now the highest they have been for a number of years and the implied risk premium on shopping centres a shade over fair value, the number of shopping centre changing hands should pick up. This is assuming a normal or steady state environment.
However, with the rise in mortgage rates starting to bite on consumer behaviour, there is every chance retail spending growth could be skewed on the downside; in particular discretionary spending. Under this scenario, the risk premium on retail commercial assets has the scope to rise further. Interestingly, the last time cap rates were at this level, back in August 2015, the cash rate was 2.5% and real yields a shade over 1%.
So, while shopping centre transactions should increase as the year progresses, it seems a further cyclical rise in cap rates may be necessary.
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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.