Beyond floorspace: investing in the next wave of retail

For most of the latter decades of the twentieth century, the major prevailing narrative in retail was the rise of the shopping mall. As consumers migrated out along the motorways of cities across the developed world into suburban cul-de-sacs, retail followed with them, and revolutionised the way in which we shopped in the process.

Those who predicted the death of the high street at the hands of the mall are still waiting for their forecasts to eventuate; in truth, quality high-street retail has evolved and in many cases thrived. Yet any property portfolio exposed to only high street floor space to the exclusion of shopping malls throughout that time would have failed to capitalise on one of the great opportunities of the past century.

We believe we’re at a similar point of inflection now with the rise of e-commerce, yet many property portfolios remain over-invested in index funds, which are overweight on retail floor space and ill-positioned to take full advantage of the coming boom in online shopping.

As has been the case with high street space, well-managed and positioned shopping centres may continue to prosper, but e-commerce retailers are honing in what really makes the modern shopper tick and they’re poised to bring on an era of expansion in the sector unlike, in our view, anything we’ve ever witnessed. The trends behind this wave are long term – demographic and technological – and once they arrive on our shores they will have enduring impacts.

Despite the tendency of commentators to use the term “millennial” as a proxy for all young people, the youngest members of that cohort (by some definitions) are now in their mid-20s, and the oldest are nearing 40. When it comes to retail, they are now the highest-spending demographic and their preferences are redefining the sector. Two of these shopping preferences have, for now, offset each other in holding back the rise of online retail: whilst tech-natives, millennials have a strong appetite for immediate gratification, which to this point has not been well catered-for by e-commerce. The power of this motive should not be under-estimated – American research suggests that half of customers decide against online purchasing because they want to take home their purchases immediately.

E-commerce retailers are cognisant of these factors, and a number are already offering same-day delivery. Advances in technology on the inventory side – better matching local warehouses with expected demand – and in outbound logistics, as autonomous delivery systems become a reality, will continue to bridge the gratification gap. E-retailers are also busy smoothing out the remaining points of friction in their web portals, with a focus on superior customer experience and ease of return. Technology continues to offer new options for consumers to interact with and experience a retailer’s products, with options for virtual sizing and styling. These trends are being led by female fashion, which is the dominant force in fashion retail, which in turn drives total retail sales and rents.

To be properly exposed to growth in the retail sector, fund managers should consider looking to invest in the logistics hubs that will be the beating heart of this revolution. Currently, many of these are located on the peri-urban fringes, which to this point has suited the geographic footprint of online retail in this country. Australia Post’s 2019 e-commerce industry report found that the top ten postcodes for online purchasing were all outer-suburban or inner-regional locations¹, where e-retailers presumably enjoy an advantage in variety, quality and cost-competitiveness compared to local offerings, and where some online retailers may be able to reach these consumers as quickly and as easily as those consumers are able to reach physical stores. As lead times decrease and the online experience becomes more comprehensive, this story will become true for an increasing number of people living closer to our urban centres, and inner-urban logistics hubs will become a valuable addition to any property portfolio.

¹Australia Post, Inside Australian Online Shopping: 2019 eCommerce Industry Report, May 2019