Some Green Shoots

The modest improvement in the number of shopping centre transactions recorded last month continues. As a consequence, transactions are well up on a year earlier, although this remains off a low base. Similarly, in the three months to November, the volume (sqm) and value of transactions, whilst modest by historical comparison, are up on a year earlier. Cap rates, even though quite erratic on a month-to-month basis, have gravitated around the 6.5% level; around 75 basis points higher than a year ago.

Shopping centre transactions continue to be dominated by smaller retail assets; illustrated by the smaller increase in both the volume and value of transactions, compared to the number. Over the past ten years, on average, eleven shopping centres transacted each month. So far this year the average is seven transactions; similar the period when the pandemic took hold. Similar to the pandemic period there is an expectation of weaker spending in the period ahead. However, unlike the pandemic period, consumers are free to venture to the shops.

After flirting with 5% long term conventional bond yields at the start of November, weaker inflation has seen yields move below 4.5%. Similarly, inflation-linked yields have eased back in tandem. However, in the bigger scheme of things, in an environment where the central bank is endeavouring to engineer a slowing in consumer spending, the implied risk premium of commercial retail property remains well below its long-run average.

Whether due to cyclical swings or structural changes, there is clearly no way of knowing ex-anti what the correct level of the risk premium should be. Simply mean reversion back to its long run average would imply cap rates well in excess of 7%; unless, of course, bond yields fall sharply.

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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:



About PAR Group

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.