Maintaining the trend, which commenced at the start of the year, shopping centre transactions continued to slow in April. In addition, commercial retail cap rates, in the three months to April, declined further, hitting a cyclical low in the process. The Data App estimate, whether compared to the previous three months or a year earlier, the number, volume (sqm) and value of shopping centre transactions all moderated. This reflected the combination of a surge in transactional activity through the course of last year and the current easing. Increasingly, it seems, the boom in shopping centre transactions, which was a dominant feature through the course of last year, has now passed.
Over the past year or so, cap rates for all shopping centre asset types have fallen, no more so than for large format and everyday needs outlets, where the declines have been greatest. Since transactions have more recently been dominated by supermarket/everyday needs centres, this has contributed to the cyclical low in cap rates.
With average cap rates coming down, while real interest rates have edged higher, the implied risk premium for commercial retail assets has fallen further; to be over 100 basis points lower than a year ago. Consequently, the amount of compensation investors are being rewarded for investment risk is now well below its long term average. By implication, the risk premium for large format and everyday needs centres has declined even further. So, as an asset class, shopping centres are a far less attractive investment proposition than they were, say 12 months ago.
Furthermore, market pricing points to interest rates along the curve rising. Should this eventuate, either investors will be required to accept a lower compensation for investment risk, or cap rates will need to rise.
The demand for shopping centres has eased since last year, while credit conditions are tightening, albeit marginally. The supply of shopping centre assets coming to market continued increased further in April, dominated by everyday needs outlets. Furthermore, with the differential risk premium between larger (regional) shopping centres and their smaller counterparts widenings, along with the economic environment becoming more normal, the attraction of larger shopping centres has become increasingly more alluring.
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