The number of shopping centres changing hands continues to dwindle. According to The Data App estimates, in the three months to July, the number of shopping centres transacted was less than half that recorded the same time last year. Needless to say, the volume (sqm) and value were also well down on a year earlier. The continuing dearth of transactions makes the accuracy of cap rates difficult, especially since the bulk of recent activity have been for smaller, lower yielding, retail outlets.
Increasingly, the strain of weak, at best, real income growth and the growing burden of higher mortgage interest payments, is starting to eat into retail spending, with purchases at departmental stores experiencing the biggest squeeze. The slowing in retail spending supports the trading statements from companies, which have been suggesting for some time, that activity had weakened. Furthermore, given the infamous long and variable lags between changes in monetary policy and economic activity, retail spending is likely to remain under pressure for a while yet.
The slowing in retail spending is cyclical and its uncertain outlook is contributing to the weakness of shopping centre transactions and exasperating the pricing mismatch between buyers and sellers. More difficult to gauge is the structural shift in spending behaviour to on-line shopping, which is impacting on all areas of goods spending.
There is a constant stream of assets being brought to market and, with little in the way of transactions, this will add to the upwards pressure on cap rates.
It would seem, given the economic environment, let alone the increasing cost of capital, when shopping centre transactions resume, cap rates will increase further. Large, destination, shopping centres, with a high proportion of discretionary spending retailers, are still likely to experience the largest rise in cap rates.
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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: