As the world becomes more and more connected online, major disruption is occurring in the real estate industry and is giving rise to new investment opportunities.
As the world becomes more and more connected online, major disruption is occurring in the real estate industry and is giving rise to new investment opportunities. As a result, the AMP Capital Global Listed Real Estate team has identified a compelling investment opportunity within the global retail property sector that the ASX-traded AMP Capital Global Property Securities Fund (Unhedged) (Managed Fund) (ASX: RENT) has made a 12% allocation to premium shopping centre companies in the retail sector*.
The world shops online
In the 20 years since Amazon launched an online book store, e-commerce has grown its market share dramatically. The UK is expected to do 50% of its shopping on line by the end of this decade.
Source: IMRG Capgemini eRetail Sales Index, 2016. Chart: CBRE Global Research 2016 (data represents non-food shopping).
This growth path has been powered by consumers who are:
- Seeking choice at competitive prices
This represents an existential challenge for retailers which offer a transactional service to price-sensitive shoppers that can be matched by Amazon at lower prices. The slow demise of Toys “R” Us is merely the latest casualty of this structural shift, and shopping centres that provide a commoditised retail destination are similarly suffering as shoppers shun higher prices in unattractive environments.
Chopping off the Tail
Major retail property owners have been spinning-off or disposing of their more commoditised assets, either into new companies or the private market.
Such spin-offs have generally followed:
- Slowing rental growth
- Disappointing earnings
- Significant stock underperformance
- Investor unwillingness to provide fresh equity or debt capital for assets that require significant defensive capital expenditure
Problem assets are packaged into a new company (Spinco) that may contain higher debt levels and often trades on much lower valuation multiples. This leaves behind a higher-growth business with lower debt and a higher credit rating - which trades on higher valuation multiples - enabling it to make new investments and return to growth.
When freed of these time-intensive but sluggishly-performing assets, management teams can concentrate on growth strategies that boost sustainable rents and asset values.
Evolving to survive and prosper
Restructuring enables shopping centres in premium locations to better adapt to the e-commerce challenge and changes in shoppers’ expectations of shopping centre visits.
Shopping centres need to attract retailers where customers actually wish to shop, such as the showrooms of cutting edge onmi-channel brands such as Apple, Nike, and Tesla.
A wider range of services and entertainment will drive a genuinely differentiated ‘experience’ that protects against e-commerce disruption. This extends beyond beauty salons, health services and mobile phone repair kiosk to a wider range of mid-range restaurants, bars, gyms, cinemas, and children’s play facilities.
The investment opportunity
ASX:RENT is taking advantage of this opportunity by establishing significant positions in companies that demonstrate deep relative value, such as those shopping centres positioning themselves as a ‘destination’ with a shopper experience that is hard to replicate online.
We have made a 12% allocation to premium shopping centre companies* including Taubman (US), Westfield (US/UK), Unibail-Rodamco (Europe), and Wharf (Hong Kong).
These companies manage portfolios of shopping centre assets that boast the highest retail sales figures in some of the best, most relevant locations in the world, and we believe these companies are best positioned to deliver superior risk-adjusted returns in this fast-changing environment.
Want to know more?
In a recent webinar I also outlined 5 real estate megatrends unfolding globally today, which are also being capitalised on in ASX: RENT. Watch the 15-minute recording below to learn more.
*11.94% of the RENT portfolio as at 30 April 2018.
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