The rise of online retailing, international brands and pop-up stores has continued to challenge traditional bricks and mortar retail assets.
Investment yields across retail-based transactions this past year has revealed that investors are preferring smaller neighbourhood centres and regional centres to sub-regional shopping centres.
New findings from CBRE research have detailed this void and the need for sub-regional shopping centres to “evolve” in order to remain relevant in the Australian retail landscape.
“Sub-regional shopping centres might rightly feel like the middle child at present: seemingly unnoticed, a bit unloved and needing to try a little harder to be heard and recognised,” CBRE head of research Bradley Speers said.
Cap rate compression and cumulative impact on value
CBRE highlighted that the low cost of capital of A-REITs over recent years has influenced high levels of investment from larger landlords spending to future-proof trophy assets with incorporating new dining, entertainment and leisure precincts into existing regional centres.
CBRE pinpointed the future survival of sub-regional shopping centres depending on adjusting their strategies by pivoting away from discount department stores and changing the retail mix within their centres.
“Our analysis indicates that neighbourhood shopping centres - underpinned by their relatively secure income profile, which focuses on food and convenience - are now being priced more sharply than sub-regional centres, which is a historical anomaly,” CBRE’s dead of research Australia Bradley Speers said.
Currently discount department stores in sub-regional shopping centres make up, on average, around one-quarter of total floor space and have an average size of 6,750 square metres generating 15 per cent of the gross rent produced by specialty shops per square metre.
CBRE national director of retail investments Mark Wizel said that due to sub-regional centres occupying large plots of land, the underlying land value coupled with the opportunity to redevelop and transform some centres into mixed-use developments was attracting offshore interest.
“Asian capital is being drawn to sub-regional assets due to their underlying land value and future development potential,” Wizel said.
“There is no better example of that trend in play than the recent sale of Burwood One Shopping Centre in Melbourne for $181 million.”
The property, eventually purchased by a private Shenzhen based developer on 5 per cent yield, highlighted the longer-term vision for the site.
“Opportunistic and value-add buyers are looking for sub-regional shopping centres and those with core assets are looking to sell secondary stock and recycle funds back into core assets,” CBRE director institutional retail investments Trent Weir said.
Earlier this year, Vicinity Centres announced plans for the sale of up to $1 billion of sub-regional and neighbourhood shopping centres.
The Melbourne-based investment trust, which currently holds approximately $6.9 billion worth of shopping centres around Australia, said it would use the sale proceeds from its non-core portfolio to reinvest in flagship development opportunities.