The uncertain role of sub regional centres in the evolving Australian retail marketplace, post the COVID 19 pandemic, is highlighted by emerging yield spreads across retail assets according to a new study by the PAR Group.
The PAR Group is an independent property research collective. The analysis was undertaken by Damian Stone of Y Research and Rob Ellis of the Data App.
The analysis reviewed over 10 years of national retail transactions involving sub regional, neighbourhood and large format centres. The study found at the beginning of 2019 yields were very similar. Subsequently, after an initial spike in yields, associated with the COVID 19 pandemic, yields for neighbourhood (around 6%) and large format centres (around 5.5%) have tightened significantly across the last 12 months. Conversely, yields for sub regional centres have increased (to around 7.5%).
The study highlighted two key trends:
- Large format retail centres have matured into an institutional asset class with yields falling from nearly 12% in 2012/13, due in part to the collapse of Masters, to below 6%, a yield more historically in line with a regional shopping centre. Current investor demand for large format centres is linked to pandemic influenced trends such as working from home and home renovation.
- The yield spread between sub regional and neighbourhood centres has widened to the largest gap in a decade. This is in part tied to the larger purchaser pool for neighbourhood centres, whose typical value, less than $30 million dollars. However, the larger determinant of the yield spread is the uncertainty of key tenants of sub regional centres – discount department stores and national fashion chains. See http://par.group/add-to-cart/ for an analysis of the major shopping exposure to e-commerce shopping.
The chart below outlines the differences in cap rates between the three retail assets from the GFC until April 2021.
Implications
Just as consumer spending behaviour has changed, so has the demand for commercial retail space. The appetite for convenience, neighbourhood and large format centres has remained solid, while transactions of large shopping centres has been more subdued. This change in shopping centre demand has been reflected in the valuation parameters.
Recent sales have highlighted a risk premium attached to sub regional centres, with a number of centres sold on 8 or 9% yields. Institutional owners have been active sellers, reducing their portfolio of these assets at a rate resembling a race to the door. Whilst previously institutional owners fought over sub regional centres particularly in non-metropolitan locales, the race now seems to be to off-load these centres to a diminishing pool of potential purchasers.
A future softening in yields is likely as the sales evidence created post COVID 19 flows through to current book values of listed entities. These potentially lower asset values have the potential to trigger further sales.
Neighbourhood centres, underpinned by supermarkets and a manageable number of speciality stores are perceived by investors as far less riskier assets. The defensive nature of these assets and changing consumer trends will likely see neighbourhood centres retain their values in 2021.
Large format centres which can offer easy parking and one stop shopping have benefitted from pandemic led changes to shopping. The pre-ponderance of homewares and furniture retailers and the emerging uses such as post offices, recreation users and medical occupiers have attracted consumer who would typically visit shopping centres. In terms of yields, the question becomes how low? It is likely yields will stabilise as consumer spending moderates and pandemic induced spending wanes.
For further information, please contact:
Rob Ellis, Director of the Data App. Mob: 0417 195 352 or email: rob@thedataapp.com
Damian Stone, Principal and Chief Problem Solver of Y Research. M: 0433 525 414 or email: damian.stone@yresearch.com.au
About PAR Group
Real Investment Analytics (RIA), The Data App (TDA) and Y Research are partners in 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. Visit: http://par.group/ for more information