Shopping centre evolution: the new opportunity in retail

Investing in retail real estate has been tricky in recent times as the growth of e-commerce and recent pandemic lockdowns took their toll on the sector.

But as COVID restrictions wane and consumers regain the confidence to go shopping, conditions for retail real estate are starting to look favourable again.

And for all the pain of the pandemic, households in 2022 are in a better position to spend than they have been in a while.

The pandemic’s combination of restrictions on movement and generous government support has left Australians with $250 billion in excess savings with a saving ratio of around 20 per cent, approximately three times the post-GFC average¹. Unemployment is low, economic growth continues to recover from COVID lows and wages are starting to rise².

These are some of the strongest economic conditions in recent history.

Coupled with this, with many people still hesitant to travel, households are likely to have even more spare cash that can be spent shopping.

And amid it all, the pandemic triggered a correction in retail valuations in 2020 that in our view has left the sector showing value compared to other real estate opportunities. Retail rents have been reset to more sustainable levels.

It’s not the glory days — and may never be again — but there are good returns available on the right assets.

Consumer preferences are changing

As a sector, retail itself is also undergoing a transition, and while traditional retail services like fashion, food and services like health and well-being will continue to attract shoppers, there are emerging opportunities that make retail very different from the investment asset of yesteryear.

As consumer preferences change, shopping centres are adapting and offering new ways for the community to engage.

It can be underappreciated that traditional retail shopping — things like the food, clothing and household furniture we buy in shopping centres — makes up only a third of the average household spending³.

The bulk of a household’s spending goes on costs like housing, transport, education and healthcare.

Traditionally, these services haven’t been a feature of shopping centres. But times are changing.

As the share of wallet spent on services grows, so too the mix of services in a shopping centre is evolving. Among real estate investors, there are several terms for this evolution — mixed use, multi-use and social and community infrastructure.

But they all boil down to one insight: increasingly shopping centres are starting to provide a raft of new services to their local communities.

Shopping centres evolve

This new shopping centre evolution goes beyond dining and entertainment. COVID has also impacted the way people want to live.

Today’s leading shopping centres are blurring the line across real estate categories by adding office space, residential, education facilities and healthcare under the same roof.

Apartment developments are a top opportunity for many malls, especially those located near good public transport links and with the ability to build up into the air space over their retail centre. Office towers are also featuring in developments.

Macquarie Centre in Sydney’s north has concept approval for residential and office towers. In Perth, AMP Capital’s Karrinyup shopping centre includes a piazza and main street with leisure, lifestyle and entertainment offerings, with a residential development underway. Quay Quarter, AMP Capital’s flagship development in Sydney’s Circular Quay is another example — as well as the striking office tower, Quay Quarter also includes luxury residential, food and beverage and boutique retail set among the surrounding laneways.

These mixed-use developments reflect the way the community is evolving.

More people than ever live in apartments and high-rise living is the fastest growing part of this trend⁴.

Shopping centres are well placed to extend into these other categories such as residential because the features that traditionally make a shopping centre successful — good transport links and high-profile locations in well-populated areas also correlate to apartment living. Adding new mixed-use services is a way of maximising the value of the land in a world where e-commerce is impacting on traditional retail categories in shopping centres.

While online shopping can take market share of things that can be delivered like groceries and apparel, spending on housing, healthcare, childcare, education, and personal services all needs to happen in the physical world.

With a strong outlook for the sector and opportunities to expand beyond the traditional asset class, in our view shopping centres look like a promising investment opportunity.

Still, there are risks.

One key challenge with the move into mixed use development is execution. It’s no simple matter adding apartment and office space to a shopping centre.

Partly this is structural – many shopping centres were not designed for the addition of towers. But also, there is a raft of complexity related to bringing in new residents and office tenants into what in the past had been purely retail space.

In particular, noise, and congestion considerations need to be taken into account. Selling apartments creates a class of new owners who will rightly hold opinions over future development, although build to rent may offer a solution for this.

And above all, investors need to ensure they start with the right asset in the first place: a shopping centre in a busy, mixed-use neighbourhood may be a better prospect than one with excess land in a regional town.

There are also important environmental issues to be managed.

Shopping centres are large energy and water consumers and produce waste that needs to be managed.

Environmental considerations are a particularly important factor for many institutional investors with mandates that require high environmental standards and expect their asset managers to understand where regulations are heading and put in place capital investment programs to make required changes.

All these considerations mean effective, on-the-ground asset management from an experienced mixed-use manager is the key to success.

1. https://www.ampcapital.com/au/en/insights-hub/articles/2021/december/review-of-2021-outlook-for-2022-recovery-to-continue-as-we-hopefully-learn-to-live-with-covid).
2. https://www.rba.gov.au/monetary-policy/rba-board-minutes/2021/2021-12-07.html
3. https://www.abs.gov.au/statistics/economy/finance/household-expenditure-survey-australia-summary-results/latest-release)
4.https://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/2071.0~2016~Main%20Features~Apartment%20Living~20