Sub regional shopping centres across Australia worth over $800 million failed to transact in 2023, highlighting the challenge determining the value of retail property assets amidst a challenging economic backdrop of high inflation, slowing retail spending, rising interest rates and an increasing cost of capital.
Over a third of sub regional shopping centres publicly listed for sale failed to transact, as potential buyers and sellers of shopping centres struggled to agree on their worth; with purchasers seeking additional returns reflective of economic conditions, while some current shopping centre owners having expectations tied to historical market values.
This misalignment of views on asset values, combined with continued interest rate rises, multi decade high inflation and uncertain expectations on consumer spending, saw shopping centre transactions significantly recede from record highs posted in 2021.
Analysis by PAR Group, shows the number of shopping centre transactions dropped by 33.2% in 2022 from 2021 levels; down 123 centres from 184 in 2021. The fall in transactions is more pronounced when considering the value of asset transacted – down 56.9% over the course of 2022, highlighting the lack of large regional centres being sold during 2022.
Yet from the limited transactions, a narrative is emerging. Yields for shopping centre assets, across Australia, are beginning to rise, with further increases more than likely in 2023. This is due to:
- Economic issues (possibly further interest rate hikes, slowing retail spending and continued growth in online retail) necessitating investors requiring a higher compensation for investment risk and;
- Market issues (the proportion of non-core assets being transacted, a shift from institutional to private ownership, and a focus on unlocking non retail value).
From a cyclical low of 4.92% in the June quarter of 2022, pricing changed through the second half of 2022, with a strong divergence in pricing based on the type of centre. Yields have risen for Destination Centres (major regional, regional and sub regional centres), to 7.3% as of December 2022, while Everyday Needs centres (neighbourhood, convenience and stand-alone) have witnessed a further tightening in yields down to 4.5%.
The chart (right) highlights the difference in market pricing for the two centre types which, notwithstanding some fluctuations, has intensified since the onset of the COVID 19 pandemic.
To gain an insight into the outlook for shopping centre yields in 2023, PAR Group, an independent property research collective, analysed sub regional shopping centre transactions for 2022.
Sub regional centres were selected due to their position in the marketplace, level of transaction activity and typical occupancy mix, having more market risk than Everyday Needs Centres. The PAR Group analysis, undertaken by Damian Stone of Y Research and Rob Ellis of The Data App, reviewed sub regional transactions by the identity of purchasers/sellers, the location of assets transacted (regional vs suburban) and asset pricing.
Key findings were:
- Between 2021 and 2022, the number of sub regional shopping centre transactions dropped 17.6% – down to just 14 sub-regional centres sold across the country in 2022.
- The value of sub regional centre sales dropped 39.3% – $1.19 billion worth of sales, down from $1.99 billion in 2021.
- Per square metre (sqm) pricing dropped 4.1% in centres sold in 2022 compared to 2021 transactions.
- 7% of transactions in 2022 involved institutional investors selling shopping centre assets to private investors.
- 1% in 2022 of transactions were centres located in regional areas.
- These latter two trends are evident of a rebalancing of institutional portfolios as owners divested non-core assets.
- There were 8 sub-regional centres publicly listed for sale that failed to transact in 2022.
Implications:
The divergence in yields between Destination Centres (major regional, regional and sub regional centres) and Everyday Needs Centres (neighbourhood, convenience and stand- alone) is emblematic of the divergence in non-discretionary and discretionary spending in recent years. With interest rates reverting closer to historical norms, in conjunction with ongoing cost of living pressures, this trend looks likely to continue through 2023 as, consumer spending, in particular for non-discretionary items, comes under increasing pressure.
How is this likely to impact the shopping centre industry? Tougher economic conditions, consumer belt tightening and long-term structural changes, such as e-commerce, will probably crimp consumer spending, resulting in higher vacancies and, in time, pressure on rents. Combined with changes to global capital markets and increased cost of capital, all point to further increases in yields in 2023.
Changes in yields are unlikely to be uniform, Everyday Centres will likely outperform Destination Outlets, due to the dominate role of supermarkets in their tenancy mix. Destination Centres, will bear the brunt of softer spending (due to a tenancy mix biased towards fashion) and are therefore expected to post, higher increases in cap rates. While both centre types are likely to record higher yields in 2023, the divergence in asset prices is expected to remain.
2022 and 2023 are a transitory period for market pricing after yields compressed through 2020 and 2021 due, in part, to excess liquidity and interest rates at near 0% rates. Rises in yields across 2022, have begun to price in the increased risk for investing in shopping centre assets. The shift in ownership profile from institutions to private ownership will also impact yields as available capital tightens. A number of recent sub regional transactions have been for the land surrounding the centre as much as the income the centre produces, as residential developers purchase older centres in suburban areas with public transport links.
The number of centres that publicly failed to transact, as well as likely additional centres offered for sale off-market which failed to sell, is evident of existing owner expectations out of line with changed market conditions. Without cap rates increases, investors should expect an ever-diminishing return from retail assets. Acceptance of rising yields will likely spur increased transactions in 2023 and provide evidence of changed retail values going forward.
For further information, please contact:
Rob Ellis, Director of the Data App. Mob: 0417 195 352 or email: rob@thedataapp.com or
Damian Stone, Principal and Chief Problem Solver of Y Research. M: 0433 525 414 or email: damian.stone@yresearch.com.au
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:
http://par.group/retail-cap-rates-to-rise-but-not-uniformly/
http://par.group/a-tale-of-two-cities-sydney-and-perth-post-pandemic/
http://par.group/perth-after-the-pandemic/
http://par.group/sydney-post-pandemic/
http://par.group/the-impact-of-covid-19-on-the-australian-office-market/
http://par.group/getting-quarter-of-million-workers-back-to-the-office/
http://par.group/working-from-home-is-not-a-free-lunch/
http://par.group/the-great-retail-yield-divide/
http://par.group/small-business-the-backbone-of-australias-major-regional-shopping-centres/
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.