Retail property Armageddon

Michael Doble

APN Property Group

Everyone shops on the Internet these days, don’t they? That’s why Armageddon looms for retailers and therefore investors in retail property. If you’re looking for a reason why the share price of Retail AREITs in the ASX 300 are down 2.3% over the last two years, there’s your answer.

You may also think these falls are justified. If so, we’d suggest you do the following three things:

The first is to take heed of the last 12 months performance. The retail sector is up 14% (even outperforming the overall AREIT market) as investors realise the value that has been created by the over selling of the sector.

The second is to visit your local super regional shopping centre, maybe Chadstone in Melbourne, Bondi Junction in Sydney or Carindale in Brisbane. On arrival, take a look around. It’s busy isn’t it? And how about those families, maybe three generations wide, engaging in an activity that is as much social as it is commercial?

These small groups are simply doing something together in a clean, convenient, climate controlled, secure and accessible environment. For them, shopping is not a chore. This is not something they want to substitute for online shopping, huddling around a mobile phone, looking at pictures of shoes.

Both activities might lead to a sale but there is a world of difference in the social activity and environment that precedes it.

The third suggestion is to consider the view of experienced investors that study shopping centre assets for a living and get their take on retail Armageddon. 

The professional view on retail Armageddon

We dig deep into the demand and supply dynamics that drive local retail property markets, analysing everything from personal income growth, population data and economic growth indicators to individual shopping centre performance, vacancy rates and rental growth.

For us, this is the only way to establish the attractiveness or otherwise of a retail property. If, for example, a particular property market has excess supply, low population growth, weak “buying power” (lower income levels) and low economic growth – it is best avoided.

It is our view that not only is Armageddon highly unlikely, the prevalence of the belief that it is, offers an opportunity.

Let me explain why.

Our AREIT valuation process includes a property-by-property risk analysis, drawing on pertinent local market data, ABS and Census data for specific areas and property specific information. We also seek to understand Australia’s high-level retail property market dynamics.

This approach delivers a very different picture from the narrative seeping into the mainstream media, foretelling empty shopping centres, declining retail brands and the end of shopping as a social activity.

4 key observations on the retail property market

This is what our research tells us about Australia’s current retail property markets:

1)The Melbourne regional shopping centre market is typified by low per capita supply, driven by the strongest population growth and Gross State Product (GSP). It is also enjoying below average new supply across all retail sectors. This is an attractive market ripe with investment opportunities.

2) The same cannot be said of south-east Queensland, a market typified by an excess supply of all categories of retail property, especially in the vulnerable sub-regional centre category. The region also suffers from below average GSP and only average population growth. The current supply phase is well in excess of national averages across most sectors and will likely compound return weakness in the region.

3) In Perth, a large pipeline of new retail space is in development, a “catch up” following years of oppressive town planning restrictions and retail trading laws stifling the market. As a consequence, a number of existing centres are experiencing major extensions, including Mandurah Forum, Westfield Carousel, Midland Gate Shopping Centre, Booragoon and Karinyup. This new supply looks excessive but being aware of the historic context makes us more comfortable. 

4) In Sydney, the market has elevated levels of new Neighbourhood and Large Format space being built. But compared with the rest of Australia there appears to be less of the weak sub-regional shopping centre space and less new supply looming. And Sydney’s higher than average regional space provision appears consistent with the population’s superior spending power.

Australia’s retail property market is well positioned

It hardly sounds like Armageddon, does it?

In Australian retail property, overall growth is broadly positive, current supply is not excessive (in an absolute sense – relative to other developed, comparable markets around the world) and neither is new supply excessive.

South east Queensland has some challenges and Melbourne is fundamentally strong but overall Australia’s retail property market is well positioned for slow and steady growth.

Armageddon appears unlikely, and retail property is not dead. We are, however, witnessing a cyclical slowdown. Different to past cycles, it has been confused by less experienced investors as a structural issue.

It’s this kind of measured, fact-based analysis that you won’t read about in the media. Instead, Amazon’s arrival has led to a kind of scaremongering that defies reality. Professional investors like us enjoy and aim to profit from the disparity.

The headlines point one way, the facts quite another. Personally, I prefer facts.

Interested in real estate?

Visit the APN Property Group blog to access the latest analysis and insights from a specialist real estate Investment Manager.


Michael  Doble
Chief Investment Officer, Real Estate Securities
APN Property Group

Michael is highly regarded in the real estate funds industry, with 31 years experience. He's held various senior roles specialising in real estate valuation, consultancy and funds management

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