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Real Estate

What retail trends mean for mall owners and investors

By AMP Capital

In the first article of our two-part analysis of the changing face of retail, our team of experts looked at some longer-term social trends and explained how these are changing the way that we shop and visit malls.

In the this second part, our team analyse how shopping centres might adapt to this changing environment and consider ways in which investors might best position their portfolios to take advantage of evolving consumer preferences.

Q. Can shopping centres survive in this new on-line world?

The media is full of stories reporting the death of the mall, and many have indeed closed, most notably in the US as price-sensitive and time-poor shoppers turn to e-commerce for much of their retail spending. However, those malls able to attract a premium demographic to a leisure experience in an attractive environment are well positioned to adapt to changing customer expectations.

In order to succeed, malls need to adapt their offerings to include a much wider range of leisure and service offerings that extend beyond retail transactions.

Furthermore, customers expect a seamless service across distribution channels through a connection between the physical and the digital. Traditional retailers are integrating their online platforms into their market offering. Meanwhile digital retailers and brands may develop showrooms to showcase tangible products. All are refining fulfilment services including mall-based ‘click and collect’ options.

Q. What are the factors that drive people into some malls and not others?

Notwithstanding the importance of an attractive leisure experience, the quality and relevance of the actual retail store experience remains critical to the success of shopping centres. This in turn depends upon retailers developing a deep understanding of their customers’ needs and delivering a compelling market proposition that aligns precisely with the chosen market’s pain points.

Discount department stores might appear to be highly vulnerable to e-commerce disruption. However by getting to know their customers, one group has invested heavily in the store experience to deliver a market proposition based on value to price-sensitive customers. However, it recognises that this segment does not perceive value as being the same as cheap. This has established the retailer as its target market’s favourite brand and generated a footfall in shopping centres that empowers it to negotiate anchor tenant lease terms with landlords.

The importance of understanding the customer and the market in which a retailer sits is especially critical when dealing with millennials. One supermarket in a particular sub-market identified the drivers of shopping decisions through extensive research. Factors such as sustainability, food source transparency, produce variety and an authentic experience were all identified as the key determinants. The retailer then invested in a development that supported an experience intended to deliver these critical success factors.

Q. How can mall owners maximise revenue as retailers face thinner margins?

In order to attract shoppers in premium demographics shopping centres must focus on delivering either convenience or entertainment.
Australian malls have benefitted from a lower allocation of floor space to department stores compared to their peers in the US. These have struggled as customer habits moved away from this shopping format. This lower allocation has resulted in significantly lower mall vacancy rates in Australia relative to the US.

Nonetheless ongoing tenant remixing to bring in retailers that are ahead of changing shopper preferences, especially those with service offerings, is essential to generate footfall and maximise rentals. However, in recognition of the more cautious Australian consumer, it is likely that retail assets that are highly exposed to discretionary spending may well come under pressure.

Q. Which shoppers are reducing their spending in shopping malls?

Australian consumers, especially those in the 25-45 age group, remain highly challenged – particularly in regard to discretionary spending. Many who are now approaching middle age face high mortgage debt levels, stagnant wages and increasing living costs. Meanwhile many within the younger demographic must negotiate university debt, an uncertain graduate jobs market and historically-low housing affordability.

However, one group under pressure is the key spending cohort of those in their 30s and 40s who are likely to be homeowners perhaps with families, and would traditionally be expected to have a relatively high level of discretionary spending. However these may now be highly indebted having bought homes at highly elevated price levels, facing rising mortgage costs and having seen little or no real wage growth in recent years.

Those investing in companies which depend heavily upon these groups should focus on the lower risk areas that are exposed to the ‘first dollars out of the wallet’ on each pay day. Members of this key group are seeing their living costs increase, which is lowering their discretionary spending. Therefore, essentials such as utilities, consumer staples and insurance may be viewed relatively positively.

Q. Where should investors look for attractive opportunities in the retail value chain?

In such an environment retailers already battling the e-commerce challenge face challenges and have underperformed the market recently.

Retailers are challenged both by revenues from a financially-constrained target market but also by accountancy changes in IFRS16. This will require outstanding rental liabilities on longer leases to be shown more transparently on their balance sheets. These factors may further impact valuations and potentially constrain their ability to borrow from the banks if their debts are deemed to be excessive.

However, pockets of opportunity may be found amongst those retailers with stronger balance sheets, which better enable them to negotiate favourable terms with landlords and suppliers. Retail-focussed REITs have underperformed the market for some time and are now valued at a discount to net asset value suggesting some disparity in views around valuation levels. A continuing robust transaction market in retail assets suggests that there is the potential for this discount to close through market valuation appreciation.

However this may also suggest that the market is discounting the risk of falling rental levels in any downturn and a consequent fall in the valuation levels of these centres.
Large global e-commerce platforms continue to focus on expanding market share and developing network effects in order to establish market dominance or at least build a defensive moat around their business. However the focus on low prices and technological investment has come at the cost of earnings, leaving market valuation levels looking extremely expensive.

Meanwhile, the e-commerce disruption that is impacting retail is also giving rise to interesting opportunities in the logistics market. Companies that offer modern facilities in centres that are well-located to serve large population centres to on-line and traditional retailers are well exposed to this growing market.

Investors can take advantage of this trend by investing in logistics companies that have both a property and services business, such as those focussed on pallet pooling. Such companies offer the prospect of growth without regard to how future sales growth is captured between the traditional high street shop and online.

  • Market Watch
  • Real Estate
  • Shopping Centre
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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.


This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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