Australia has a love affair with property, however you can’t go a week without seeing a newspaper headline proclaiming the next property crash. The low level of global and local interest rates over the last 9 years has caused property prices to go up significantly due to low financing rates and investors searching for an investment vehicle to provide them with a better yield then they are able to receive from the banks. The apparent benefits of property are good long term return potential.
Generally property is an asset class with lower levels of volatility and when added to an existing portfolio of shares and bonds it is an excellent diversifier of overall portfolio risk. Headlines, as always, are dangerous as they are designed to sell newspapers and don’t provide the full picture. With property (as with equities) there are a large number of factors to consider. This includes the ever important location, location, location as well as the yield on the property. You also need to consider which sector of the property market you are looking at, is it residential housing? Commercial buildings? Industrial factory space? Or retail shopping centres to name a few. At TAMIM we are constantly researching investment markets for opportunities to deliver returns to clients and over the next few months we will be sharing our thoughts on investing into the various property sectors starting with retail.
There are a lot of significant factors that impact the performance of a shopping centre be it regional or metropolitan.
One thing that is noticeable is that the performance of the anchor tenant be it a supermarket or discount department store has a very strong bearing on the overall returns of a shopping centre. The anchor tenant can, amongst other things, be impacted greatly by opening hours, the range of goods on offer, the price point, and the ratio of car parking. This, logically, can impact the performance of the adjoining specialty stores. If customers visit the centre for their staples then the surrounding stores will, in turn, benefit from increased foot traffic.
As can be expected, the retail sector will always face cyclical and structural economic issues. Several cyclical issues are beginning to move in the sectors favour. With strong growth in four or five sectors and dwindling numbers in four or five other sectors, employment is a cyclical issue significantly impacting the performance of any given shopping centre. The jobs gained and lost are not necessarily in the same locations. It follows that certain catchment areas are doing better than others.
The catchment area for the shopping centre impacts the performance of the centre. Accessibility (i.e. the surrounding road system and the actual points of access to the centre) is a factor while location in relation to competing centres is also important when projecting performance. As you can imagine, the size and demographic (age etc.) of the population as well as the potential for its growth in the long term can have a material and critical impact on performance. In today’s world, with greater fluidity of the global population and increased levels of immigration, ethnic factors are increasingly playing a role in determining the performance of shopping centres too.
Continuing this discussion around employment and catchment areas, the size and shape of the workforce has a weighty influence on retail property. Wages dictate spending and jobs roughly delineate catchment areas. Australia is one of a small number of countries that have enlarged their workforce over the last ten years. The Australian workforce continues to grow in size while unemployment creeps lower. This has occurred in part because growth in wages has been borderline stagnant allowing for the hiring of more workers than may otherwise have been the case. Inflation in asset prices has boosted household wealth despite household income growth being restrained. Growth in household disposable income remains below average despite positive contributions to household spending capacity coming in the form of increasingly low interest rates, depressed petrol prices and increased comfort regarding job security.
It appears that changes in consumer spending patterns in the last decade have had a negative effect on apparel, department store, and discretionary retailing turnover in general. This has affected tenants in many regional and some sub-regional centres. Many sub-regional shopping centres have been immune from this though. The turnover statistics from ABS in the table below show robust growth over the long term in many of the significant retail categories found in your average shopping centre. Supermarkets have been seeing solid turnover growth as have the liquor stores that come under their stable. Discount department stores dealing in discount clothing, electronics, and household goods including furniture have also been experiencing decent turnover growth. Specialty shops associated with shopping centres such as bakeries, chemists, newsagencies, take away food stores, and other local service providers such as dry cleaners may be in the tenancy mix too.
The Amazon factor:
In addition to these broader issues, there is the imminent arrival of Amazon on our shores to consider when looking at retail property. There is no doubt that Amazon arriving here will have a significant impact on retail. Having said that, there will be a grace period of sorts before the impact is truly seen. Amazon will need to set up the infrastructure they need to properly compete with shopping centres and follow that by winning over the trust of the Australian public before taking significant market share. In looking at the entry of Amazon to the Australian market one must also consider that regional and sub-regional shopping centres will unlikely be affected anywhere near as quickly or as much as those located in the major cities as Amazon will look to establish itself and win over major population centres like Sydney and Melbourne ahead of places like Newcastle or Ballarat. To this point, Amazon recently confirmed it will open a 24,000 sq metre warehouse in Melbourne's Dandenong South.
The Trend for 2017:
Smaller stores are in; larger stores are out.
Changing consumer preferences will push more and more “big box” retailers to focus their attentions on smaller-format stores. Less is more in 2017 when it comes to store size. Retail giants such as Target, Best Buy, and Ikea are already adjusting to this trend by increasingly spending on smaller-format stores instead of their traditional borderline-warehouses. The importance of convenience and accessibility in todays world of instant gratification is key to understanding why shoppers are moving away from larger stores. People just don’t want to waste their valuable time roving the never-ending aisles of huge stores these days. They want things to be made easy for them with smaller stores offering specialised selections. Additionally, smaller stores cost less to establish and run. They also take up less space in urban environments which allows retailers to capitalise on the potential of more densely populated areas.
"Retailtainment", as may be evident from the name, is the combination of retail and entertainment. The concept is a concerted effort by retailers to offer shoppers a fun or unique experience that incorporates lifestyle elements into their stores. Things like boutique coffee offerings or reality experiences that are more likely to engage retailers and keep them coming back for the shopping experience. For an international example one can look at Fortnum and Masons, a department store in Piccadilly in London. The 3rd floor has been transformed from menswear (which is offered in overabundance in other local outlets) to a cocktail bar.
The structural issues facing retail property can be formidable but certainly not insurmountable. TAMIM anticipates that the retail sector will evolve to take advantage of these structural issues rather than be over-whelmed by them. An ageing population will not stop creating challenges for the retail space as they compete for the all-important spending of retirees. Retirees can usually be expected to show preference for services over goods and will not necessarily continue to dwell in their traditional catchment areas. Online shopping has already had a great impact on retailing for certain categories of goods and, with the imminent arrival of Amazon, it will no doubt continue to present challenges for the sector. Retail has already been forced to begin adapting without the world’s biggest player arriving and will continue to do so. Certain areas, notably regional and sub-regional centres, will likely hold out longer and more effectively than their metropolitan counterparts.
Markets & Commentary
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TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.