Listed to unlisted ownership


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Source: JLL Research


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Source: JLL Research

Rationalising AREIT portfolios

Source: JLL Research

AREITs actively accelerated their divestment plans in 2018 to focus on smaller and more refined retail portfolios given the growing management intensity and capital intensity of the sector. Total asset sales by AREITs reached $1.5 billion in 2018 – the second highest figure in the last decade (after 2017). However, AREIT acquisitions were also high in value terms in 2018 ($1.6 billion), driven primarily by two major transactions (Scentre Group purchasing 50% of Westfield Eastgardens for $720 million and SCA Property Group purchasing 10 assets from Vicinity Centres for $573 million) which contributed to 80% of total acquisitions.
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Vicinity Centres, Stockland, Charter Hall Retail REIT and Abacus Property Group all sold down retail assets in 2018. Vicinity Centres, Stockland and Abacus were all exclusively sellers in 2018. Charter Hall Retail REIT was also a net seller but continued to selectively acquire as well. Some AREITs continue to selectively seek out acquisition opportunities but have tightened their criteria. Scentre Group acquired a 50% share in Westfield Eastgardens in July 2018 from Terrace Tower Group (which retains a 50% share in the centre).

Vicinity Centres has been the most active seller of retail assets, having sold approximately $4.0 billion worth of assets since the start of 2016 including approximately $3.0 billion via the REIT and $921 million via managed funds. Vicinity Centres was the biggest seller of retail assets in 2018, having sold 17 assets for over $1.1 billion, including a portfolio of 11 shopping centres for $631 million. Within the portfolio, ten shopping centres were acquired by SCA Property Group for $573 million and one shopping centre (Belmont Village) was acquired separately by a private investor for $58 million.

AREITs rarely sell to other AREITs. Outside of the Vicinity Centres portfolio sale to SCA Property Group, there have been just seven other transactions totaling less than $1.2 billion over the last decade, equating to less than 2% of total transaction activity over that period. As the retail and shopping centre industries continue to evolve, AREITs are narrowing their strategies. They are becoming more focused and specialised to extract value and maximize returns. There is scope for further AREIT asset sales as owners to rationalize their portfolios.
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Emerging value in the retail sector

Source: JLL Research

In our previous annual outlook report we highlighted the start of a divergence in asset pricing reflecting the divergence in fundamentals for individual assets which had been occurring for a number of years. The trend progressed as expected in 2018. Core asset yields stabilised at their record low levels while yields for secondary assets softened. The benchmark for core retail assets (primarily core regional shopping centres) remained unchanged at approximately 4.00%-4.25% having reached those levels with the part share sales of Highpoint Shopping Centre and Indooroopilly Shopping Centre in 2017 and the part share sales of Pacific Werribee and Westfield Eastgardens in 2018. Pricing for core retail remains firm and strong performing assets are very keenly pursued by a narrowing range of domestic and international capital sources.

Australian retail in global context

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Source: Oxford Economics, JLL Research

Global institutional investors have been attracted to Australian retail real estate for a variety of reasons: market transparency, low volatility, tight planning controls, attractive returns, ease of transaction process and access to professional management partners. Major retail assets were historically difficult to access for offshore groups because assets were tightly held and the concentration of ownership was high. Since about 2012, domestic owners have been restructuring their portfolios and selling assets to raise capital for redevelopment projects and to reduce debt which has created opportunities for offshore investors.

Long-term demographic drivers

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Source: ABS, JLL Research

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The age distribution of the population is likely to be supportive of retail spending over the next ten to 15 years. The ABS forecasts that over the next ten years, the total Australian population will grow by approximately five million people. Their projections show that the biggest growth will come from the 38-43 age cohort which will account for around 500,000 additional people, equating to 2.7% per annum, considerably faster than the national average of 1.8% per annum according to the ABS forecast. This is a significant consideration for the retail sector given that the peak age for household income and household consumption is between the ages of 45 and 55 (according to the Reserve Bank of Australia) and the largest cohort of the population will be reaching that bracket.

Short-term drivers of fundamentals

Source: ABS, JLL Research

The ABS has reported a small rebound in retail turnover growth from 2.5% year-on-year in July 2018 to 2.9% in November 2018. Growth accelerated across all major spending categories except department stores. Anecdotal feedback suggests retail leasing conditions remain challenging as retailers continue to consolidate their store networks. However, if the recovery in retail turnover growth continues, it will be supportive of retailer and landlord sentiment.

Development trends

Source: JLL Research

Owners continue to deploy capital into innovative and creative developments to drive consumer engagement and generate retailer interest. Owners and developers will be looking to capitalise on the segments of the market which are performing well for leasing opportunities – F&B, entertainment, retail services, sports and recreation as well as health and lifestyle uses such as gyms.

Overall retail supply (exc. single-tenant retail warehouses) was low in 2018 and is likely to remain low over the medium term. Neighbourhood centres accounted for the largest share of completions in 2018 – a trend expected to continue to 2021.

Major developments being scaled back

Source: JLL Research

Source: JLL Research

Source: JLL Research


We have analysed major retail developments and capex spend using available information for 26 projects which we split into 2014-15, 2016-17 and 2018-21. The average spend per square (GLA) for projects either completed in 2018 or in the pipeline (2018-21) decreases notably from prior years. Shopping centre owners may look to scale back the size of new projects in the pipeline given the subdued performance of international fast fashion retailers and the renewed focus on driving productivity through refurbishments than through extensions. As a result, we expect spend per square metre to rise in future as project schemes are revised or new projects are announced.


Low supply per capita

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Source: Deloitte Access Economics, JLL Research

Around 1.9 square metres of retail space has been added for each additional person over the last 25-years (exc. single-tenanted large format retail). By looking at change in retail stock compared with change in population we have observed as significant slowdown in the rate of new supply. Based on population growth forecasts from Deloitte Access Economics and JLL’s completions data (additional sqm’s only), retail supply per capita was approximately 0.9 sqm in 2018 and is projected to be 0.9 sqm in 2019, and averages just 0.8 sqm p.a. to 2022. With supply running at less than half the 25-year historical average, it implies that the market has adjusted for a structural slowdown in retail spending growth, especially given that online retail sales leakage is less than 9% of total sales.

 

Strong consumer trend / generational preference to dining out supports F&B space re-allocation

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Source: ABS, JLL Research

F&B has been a major driver of tenant demand and leasing activity, particularly in new and re-developments. Owners have been upgrading, refurbishing and extending shopping centre dining precincts to capitalise on new food trends, concepts and operators – the cyclical element of F&B.

The other factor is the long-term generational shift towards dining out. Various studies, including one by Bank of America Merrill Lynch, show that ‘Millennials’ spend as much, if not more, on dining out as they do on groceries, compared with ‘Baby Boomers’ who spend less on food overall (groceries and dining out) and spend approximately half the amount dining out than on groceries.

Re-organizing the retail hierarchy

A range of long-term demographic, technology and social factors are evolving the retail landscape – from ecommerce to changing lifestyles and shopping preferences (greater residential density and changes in household spending patterns). Other demographic changes like differences in the age distribution of the population are also having an effect. The implication of many of these trends is that the industry will require a new way of thinking about the retail hierarchy and how assets are built, valued and managed.

  • Changes in tenant mix and physical layouts will lead to an evolution of the retail formats over time, away from traditional categories. Urban retail is likely to grow as a category as capital cities become increasingly dense and traditional shopping centre layouts become less efficient at maximizing site usage and land availability. As a result, there is likely to be more mixed-use retail development above or around key transport nodes or in major commercial or residential buildings. In other cases, some shopping centres may emerge as providing mostly F&B, potentially exclusively. There are examples around Asia which have adopted this specialization approach to benefit from the effects of clustering. Community retail centres may also emerge in suburban areas as providing primarily key services like childcare, gyms and health-related uses – another example of the potential specialization.
  • New metrics and benchmarks for measuring tenant performance and determining rent may be required given the inter-connected relationship between online sales and the role of the physical store. This is particularly the case in regards to click and collect (distribution), returns and showcasing / showrooming, as well as marketing / branding benefits of having a physical presence to complement online sales. Real estate will continue to play an important role in a retailer’s strategy for these reasons, but measuring performance and determining rent will need to evolve. The traditional occupancy cost ratio method may not be the most accurate measure of tenant health any more – given the differences in profitability between retailers and categories. Heat mapping of customer foot traffic may start to be used to assess the value of retail space – i.e. number of customers entering a store or the number of customers passing each tenancy.  
  • Click and collect, food delivery services and ride sharing will have implications for design and layout of shopping centres and redevelopments. For example, shopping centres may look to accommodate ride sharing pick up / drop off zones into new developments as well as parking and pick-up areas for food delivery couriers or even customers looking to utilize click and collect. Although this will ultimately be a tradeoff between providing convenience and increasing dwell time.

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