Thoughts on Myer and the wider market

Pat Barrett

UBS Asset Management

At the Bank of America Merrill Lynch AREIT conference in Sydney, panels discussed how to keep the mall relevant, the strength of the Sydney commercial market, policy impacts upon the residential sector and capital flows. Meanwhile, Myer released their revised strategy, offering insights into the department store sector. The key points that I took from these updates are as follows:


Myer released their strategy update (all 128 pages of it), recalibrating their prior sales targets due to retail sales growth slowing and declining footfalls in malls. In relation to AREITs, they will have reduced their footprint (m2) by 10% in FY18, having already closed three stores and handing back space in four stores, with an additional three store closures to occur (Hornsby, Belconnen and Colonnades). They acknowledged it was a tough retail environment but still have growth targets (revised down).

There's been some bad news stories out of the US with JC Penney the latest to struggle but Myer tried to quell the pain by highlighting that Australia has less department store space per person than in other developed countries, plus we have population growth. AREITs have been dealing with this issue for over a decade, with most malls having reduced their exposure to department stores. However, the long-term contractual leases in place mean that Myer is liable to pay rents for many years to come.


  • Successful retail assets will be "urban living rooms", where people go to socialise, get kids out of the house, etc as well as to shop. Landlords are doing whatever it takes to lure people, with some creating architectural features so that the Millennials can take their Instagram pictures. Frasers have launched a new Palace Cinema at their Broadway development (Central Park) that comprises ten screens, plus three Platinum cinemas and multiple lounge and bar areas. The lounge and bar areas provide food offering utilising product from existing retailers in the centre so everyone's a winner.
  • Online retailers don’t necessarily have to open physical stores, but it does help cement the brand. The great advantage of online retailers is that they know where their customers are and so they can target their strongest markets via opening a physical presence nearby, typically a collection store. There is acknowledgement though that the best way to convert a customer is to have a really good physical experience.
  • Mirvac commented that some literature regarding the demise of retail underplays the need for human connection. People don’t buy nice things online (eg. clothes) to stay inside. They go out to show case their goods. People need people. Mirvac introduced a nanny service in some centres, whereby either the nanny takes the kids off your hand or the nanny comes along to shop. The average spend increased 4x with the service.


  • Westpac has been surprised about the lack of defaults thus far in the apartment markets. They’ve seen good speed to settlement and Melbourne has been quicker than Sydney. Some developers have been caught in Brisbane and Melbourne but banks were paid and the developer struggled to get their equity back. It is expected there will be more issues next year.
  • Around ½ the development sites 10kms from Sydney and Melbourne are owned by Chinese interests who paid full prices. Some have come to the market seeking to get their money back; ie. exit. Local players are sitting back and waiting for an excellent deal.
  • Non-traditional financiers have entered the market, beating the banks recently to secure debt. One recent deal in Bondi went to a party backed by a US Teachers Pension Fund.
  • Sales remain strong with Stockland and Mirvac both reported good starts to FY18.


  • After many decades of lacklustre growth, Melbourne is looking attractive. It offers cheaper rent vs Sydney and much lower capital values per m2 vs Sydney, albeit the cap rates are tight. Docklands is now largely developed which means supply shocks should not be as significant as the past. It's largely the local investors buying in Melbourne as the offshore buyers still want Sydney.
  • Expect some more REITs to sell Sydney assets with pricing cyclically high. A few expected deals include 20 Hunter St, Sydney which was bought in 2013 for ~$100m, now expected to achieve a sale price ~$180m to $200m. Then there's 1 Castlereagh St Sydney that was acquired for ~$70m and could also allegedly reap ~$200m.

Capital flows

  • Australian real estate continues to attract massive amounts global capital. A very experienced Australian working in Asia said that everyone loves the Australian market and talked very positively about it, but when he gets home everyone is talking it down.
  • It's not a homogenous cycle with different rental conditions within sectors. For instance in the office market Sydney is in the latter stages of the rental cycle and Perth is at the bottom. In retail there's tough conditions and industrial is mid cycle.
  • In relation to cap rates, there's an argument for this environment to continue ("lower for longer" or as Charter Hall said, the "Artic midnight").
  • The key issues in past downturns has been oversupply of space, or too much debt. Pleasingly Australia is very well placed on both fronts.
  • REITs are happy to develop given comparable pricing for new assets.
  • There was a lot more said but the key points were that the local AREIT market is in good shape and that the underlying markets are solid.


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3 stocks mentioned

Pat Barrett
Pat Barrett
UBS Asset Management

Pat Barrett has twenty five years experience in the listed and direct property industries, most recently covering property securities, infrastructure and utilities analysis at UBS.

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