You will have seen the headlines. “Shopping centre sold at record low yield”, “Nine disappointed bidders as supermarket sells well above reserve”. Yes, purchase yields for Australian shopping centres of all types have declined sharply in the past three years as fund managers and private investors snap up almost everything available. And there’s the rub. There has been very little available. Why is the investment market in Australia so tight? It is difficult to develop shopping centres in Australia. This is due to a stringent urban planning environment which acts to limit sites. There is also the limited number of major anchor tenants available to choose from. With few exceptions, no-one will build a new enclosed shopping centre without a pre-commitment from either the Coles Myer or Woolworths stable. This means that the level of shopping centre development in Australia generally reflects the business strategy of those two companies.
The entry of a major overseas retail chain prepared to anchor enclosed shopping centres (a pre-commitment from German supermarket chain Aldi is not large enough to fit the bill), would cause a similar effect as bestowed on the airline industry upon the entry of Virgin Blue and, for a while, Impulse. Many have tried to establish a foothold here, but no major overseas chain has made it. Efforts by second tier (by size) retailers such as David Jones and Harris Scarfe have not succeeded in breaking down the power of the big two. So there is an inherent scarcity value in Australia when it comes to retail property.
The other factor to consider is track record. According to the Property Council of Australia’s property index, during the 1990-92 recession retail property as an asset class continued to provide positive returns to investors at the same time that office and industrial markets were showing sharply negative total returns. This is not to say that every shopping centre carried on trading as though unemployment had not reached 11% as it did in most states. On the contrary, declining investor demand saw purchase yields blow out to between 10.00% and 12.00% for community and neighbourhood centres. What has got today’s investors excited is that when they look at what happened to rental income in well managed centres during that time, they see that it increased. Not by much mind you, but a far better scenario than having exposure to office markets with 20% plus vacancy rates and 50-70% declines in market rents as was the case in Sydney Melbourne, Perth and Adelaide during that period.
There is a school of thought emerging that this track record is leading to a re-rating of shopping centres when compared to other property asset classes. We won’t know for sure until the next major recession. Whatever the outcome, it is a sure bet that Australian shopping centre yields will reflect both their scarcity value and their track record and while nothing is certain, a major economic decline would be required to engineer the 10-12% purchase yields for supermarket based shopping centres seen a decade or more ago. Just one note of caution. Shopping centres are like children – they need constant care.
Make sure you invest through a good manager.
*By Anton Lawrence, Director of Managed Investment Assessments.
