The Australian retail sector is challenging with a range of cyclical and structural factors impacting centre and asset performance. The latest Australian Bureau of Statistics (ABS) figures on retail turnover (seasonally adjusted) showed turnover growth below trend at 2.5% over the 12 months to September 2019. Our monitoring of retail vacancy rates highlight a reduction in new store openings and the rationalisation of retailer footprints. Sub-regional shopping centres are most exposed to retail sector headwinds and the national vacancy rate (arithmetic average) increased to 4.8% in 2Q19 – well above the 10-year average of 3.1%.

The headline vacancy rate only tells part of the story. Our centre managers’ insight publication revealed that 35% of centre managers’ reported an incentive of over 20% was required to attract a new tenant – up from 14% in the December 2015 edition of the survey.

The phrase “experience economy” was first coined in an article by B. Joseph Pine II and James H. Gilmore in 1998. Shopping centres are a microcosm of the experience economy and consumers require a diverse range of experiences from shopping centre visits. Proactive owners have responded to changing consumer requirements by evolving the tenancy mix to include more F&B, leisure activities, beauty and even urban farms.

Against this challenging backdrop, it may seem strange to classify Australian shopping centres as opportunity rich assets. We believe the opportunity relates to development activity to diversify the income stream. Chadstone in Melbourne – the largest shopping centre in the Southern Hemisphere – is at the forefront of this evolution and includes a hotel and multiple office towers.

Development potential extends beyond traditional property sectors. The nascent Build-to-Rent sector in Australia is one clear development opportunity. However, we believe the target demographic for the first generation of Build-to-Rent projects will be younger professionals. As a result, only shopping centres with a catchment comprising a high proportion of 20-35 year olds will be relevant.

An interesting asset enhancement strategy relates to healthcare – a sector of increasing importance to the Australian economy. The ABS estimates that 15.7% of Australia’s population is above 65 years old, a figure projected to rise to 19.1% by 2050. In the US, the ageing trend is more advanced and shopping centre owners have started to respond. Simon Property Group recently opened the Leonard Cancer Institute on a former parking lot at The Shops at Mission Viejo in Southern California.

The introduction of a healthcare component to the sector comes back to understanding the catchment. A quick desktop research exercise shows the median age of a resident in Mission Viejo is 7 years higher than the US average, while the median income is double the US average.

The Australian retail sector is going through a period of evolution. Owners and investors have an opportunity to re-assess the characteristics of the sector. We believe that assets with development potential to diversify the income stream will be well positioned to navigate the structural changes within the retail sector.

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