By Benjamin Chow on January 6th, 2020
Talk of a retail recession abounds in Australia even though the Reserve Bank of Australia has slashed interest rates three times since June 2019 to a record low. There are concerns that this is insufficient to stimulate the ailing sector, which has faltered significantly in the past two years, having exhibited much resilience earlier in the decade.
A comparison of the retail subtypes reveals a marked divergence in how prices are weathering the current challenges. Yields for sub regional centres are the highest across the retail property subsectors and have remained just below the 7% level for the past two years, even as those of office and industrial assets have rapidly compressed. (This article uses Property Council of Australia retail classifications.)
However, this has not been the case over the longer term. During the 2007 boom, for instance, sub regional centres were more expensive than CBD offices and industrial properties. Yields for neighbourhood centres, the slightly smaller counterparts of sub regional centres, have edged upwards by 30 basis points in 2019.
At the other end of the spectrum, high street retail shops remain the most sought-after commercial subtype. Yields appear to have moved out significantly in recent years, but this is mostly due to retail assets in Sydney, where yields have shifted by 90 bps since 2017. In Melbourne, city centres and shops are trading at some of the lowest ever yields.
Between these pricing extremes sit the country’s largest shopping malls: regional centres. In terms of pricing, these assets have weathered the growing headwinds best, with yields actually compressing throughout 2019 to a new historical low. Remarkably, this comes even as deal volume has dwindled to an eight-year low, demonstrating how tightly guarded the supply of these assets can be even in such a negative climate.
In view of the above, Singapore-based SPH REIT’s purchase of a 50% stake in Westfield Marion in Adelaide in December 2019 might be considered somewhat of a steal. Despite reports that it traded at a discount to its book value, the yield of 5.6% places it squarely at the midpoint of the range of regional centre yields for the year. It was also by far the largest Australian retail deal of 2019, both in terms of amount transacted and size.
A spate of valuation write-downs for property and brand owners concluded a difficult 2019. Looking ahead, however, the new year could bring some relief to retail landlords, with talks of further rate cuts and alternative policy measures such as quantitative easing and tax cuts, along with renewed optimism in the housing sector. Either way, prime retail assets look best poised to ride out the current downturn.
RCA’s Asia Pacific Capital Trends report covers the latest deal volume and pricing data for the region as well as analysis of cross-border capital flows. The 2019 year in review edition will be published February 4.
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