The number of shopping centre transactions remains at a low ebb. In the first six months of this year, less than half the number of shopping centres changed hands compared to the same period a year earlier. Consequently, the volume (sqm) and value were also well down on a year earlier. The sparseness of transactions makes the current accuracy of cap rates more problematical. Even so, it seems reasonable to conclude, overall cap rates have increased by a shade under 200 basis points from their cyclical low. Continuing the trend, cap rates for smaller, everyday needs shopping centres, while having increased, remain well below those for larger destination shopping centres.
It seems shopping centre transactions are floundering for a number of reasons.
- A mismatch of price expectations between buyers and sellers;
- The increasing cost and ability to raise capital and;
- The upcoming revaluation of retail assets in the reporting season setting a new cap rate benchmark.
To date, in the light of higher mortgage payments and modest, at best, real income growth, retail spending, while slowing, has remained resilient. However, the growing message from discretionary retailers is one of softer demand. With further mortgage rate rises still to feed through the system and little sign of real incomes increasing, a further squeeze on discretionary spending seems highly likely.
With the cost of borrowing priced to rise further and the outlook for retail spending uninspiring, at best, it seems the bias to retail cap rates remains on the upside. Furthermore, the upcoming reporting season may provide the catalyst for a rerating of asset prices.
It remains the case cap rates for everyday needs shopping centres will continue to be well below those for destination outlets, such as sub regional and larger centres.
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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.