Ramp up in Australian retail development, bullish or bearish motivations?

August 15, 2013 / By

Why are landlords ramping up their development pipelines given sluggish retail spending growth, a challenging leasing market and downward pressure on rents? This question is arising increasingly frequently.

While a significant uplift in development activity seems like an ambitious, even aggressive strategy given the subdued outlook for the retail sector, the rationale is actually more conservative and risk averse than the initial proposition suggests.

Three of the main motivations are listed below. However, it is important to note that the developments that are progressing are almost exclusively refurbishment and extension projects on some of the largest and most productive centres in the country. This is the case for regional shopping centres which have a stronger chance of leasing success and can support additional stores. In the case of the sub-regional format, the majority of projects are being driven by the demand from major tenants (supermarkets and discount department stores) with an incremental increase in specialty stores.

  • Defensive – By undertaking these works on their major existing shopping centres the retail offering is improved and expanded. This allows the centre to protect its dominance within its trade area. It also provides an opportunity to reconfigure the centre and reshuffle the tenants, a strategy that is becoming increasingly important in Australia as performance between different retail categories is diverging. Refurbishment also allows a centre to accommodate the newly arrived international retailers that require typically larger store formats.
  • Necessary – Non-essential capital expenditure was largely cut off at the onset of the Global Financial Crisis from 2007, so many centres are now in need of, or are overdue, refurbishment works. With the retail sector becoming ever more competitive, the importance of these works is growing in order to maintain relevance.
  • Financial – Redevelopment in most cases can increase the portfolio WALE (weighted average lease expiry) – another risk averse tactic – which provides an added level of certainty to future income. Longer average lease expiry is facilitated by attracting additional major tenants with long lease terms, as well as new specialty stores. The projects also improve overall portfolio quality, which is consistent with the strategy outlined by many major retail landlords. Further, development can potentially increase turnover and rental growth, therefore driving capitalisation rate compression on completion. Potentially this allows centre owners to achieve a stronger return on equity than is currently available on new acquisitions.

So the motivations are clearly more conservative than aggressive. Although retail spending and leasing conditions are still challenging, landlords have identified a range of benefits to reviving development pipelines which have been in hibernation for more than five years.

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