Why Cap Rates Are Too Low

Shopping centre transactions, despite edging up marginally in September, continue to meander along at a low rate. Whilst the number of transactions, in the three months to September is slightly down on a year earlier, the value and volume (sqm) are marginally higher. The Data App also estimates shopping centre cap rates are slightly lower than a year earlier although, given the small number of transactions, domination of small retail assets, this continues to make the accuracy of cap rates problematical.

Clearly, with an ample supply of shopping centre assets on the market, the lack of transactions is primarily due to a lack of buyer interest. There seems to be two possible interrelated reasons why this is the case.

Firstly, the demand for assets has shrunk. With little appetite presently from the AREITs to acquire shopping centres in general and large centres in particular, the prime source of demand is likely to come from either overseas, primarily sovereign, funds or syndicates. This source, in turn, is increasingly constrained by the increase in the cost of capital.

Secondly, is the price at which property holders are willing to divest assets. In the year to June 2023, according to The Data App estimates, cap rates increased by a shade of 80 basis points to a shade under 7%. In comparison, the change in the weighted cap rate of all the AREIT shopping centre assets reported was an increase of 24 basis points to 5.3%. While some allowance needs to be made for the mix of assets which have been sold, compared to the AREIT portfolios, the gap in valuations is stark.

To increase the attractiveness of retail assets to investors, cap rates clearly need to rise.  This is particularly the case for larger retail assets, which are beyond the reach most retail investors and therefore need to attract syndicated or overseas funds

Finally, the recent decline in cap rates, due to the domination of small centres being sold, also means the implied shopping centre risk premium is some way below its long run average. Without taking any view of the outlook, the risk premium would also suggest cap rates need to rise to increase by around 155 basis points to bring the attractiveness of shopping centres back to their long run trend.

For further information or additional data, contact rob@thedataapp.com

 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.