Australian shopping centres: how big is too big?

March 16, 2015 / By  

Australia’s major shopping centres are getting bigger. QIC is planning a redevelopment and expansion of Castle Towers, in Sydney’s north west. The project has been estimated to cost over AUD 900 million. The expansion will transform Castle Towers into Australia’s second largest shopping centre, at 193,000 square metres upon completion. Many other institutional landlords are undertaking similar redevelopments, refurbishing and extending regional shopping centres (regional is the largest mall format in Australia). Redevelopment is a defensive strategy to expand a centre’s offering and to protect its trade catchment by increasing the range of retail, service, entertainment and food and beverage offering. It also creates investment product where it is not otherwise accessible and can deliver returns on developments above those available on acquisitions.

The development costs for the recently commenced regional shopping centre projects have ranged between AUD 300 to 900 million per centre. AMP Capital recently completed a AUD 440 million redevelopment at Macquarie Centre; other projects in its pipeline include Pacific Fair (AUD 670 million) and Garden City Booragoon (AUD 750 million). Novion Property Group and Gandel Group are currently undertaking a AUD 580 million redevelopment and expansion of Australia’s largest shopping centre, Chadstone. Upon completion, the value of Chadstone is expected to be over AUD 4.0 billion.

As a result of these capital intensive projects, the value of some of these super-regional centres have increased significantly, and can range from AUD 1 billion to AUD 4 billion. This does raise the question – could there be liquidity risk in some of these assets given their significant lot size? In the event of a major financial market shock, creating a need to sell assets, there would be a limited number of investors with the capacity to absorb such a large investment, even on a 50% or 25% part-share basis. One potential outcome from this development cycle is that owners of these super-regional shopping centres may look to divest part-share interests to reduce their exposure to individual assets and diversify by asset, geography or retail sub-sector.

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