Despite all the noise of the impending “retail apocalypse” in 2017 and headlines of negative sentiment towards retail which continued throughout 2018, the retail industry in Australia has remained relatively resilient versus our global counterparts.
While much of the negativity was overblown, there were certainly some events that reflected a challenging environment, including Sears and Mattress Firm filing for Chapter 11 bankruptcy in the US; the closure of all Toys R Us stores in the US, Britain and Australia; and local brand Roger David closing its 57 stores after 76 years of operation.
Within Australia, while retail sales have remained soft amidst a low wage growth and inflation environment, gradual improvements across the Australian Bureau of Statistics (ABS) retail trade series and our own portfolio suggest that we have passed the low point for now.
Additionally, while some retailers are certainly finding current conditions challenging, the number of retail trade companies which entered a form of external administration for the year to November 2018 was lower than the five-year average. From an investor’s perspective, the average total return for retail in the year to September 2018, according to MSCI, was +7.9 per cent. This compares favourably to the returns generated in the US (+4.3 per cent) and the UK (+2.8 per cent).
While 2019 will likely be another challenging year, we believe the Australian retail sector will continue to stand up on the world stage for several reasons.
Foundations for performance
Australia is a stable, developed economy with long-term growth drivers that are maintained through economic cycles. Population growth has averaged 1.6 per cent per annum over the past 15 years and the International Monetary Fund (IMF) forecasts slightly better growth of 1.7 per cent per annum over the next five years. This provides a strong foundation for retail trade growth and compares favourably to other markets such as the US, with forecast growth of 0.6 per cent per annum, and the UK with 0.5 per cent per annum.
While the turnstiles in Canberra may paint a different picture, Australia is one of the most stable countries in the world, an attribute vitally important when considering the performance of an asset class with investment horizons often longer than 10 years. From a macroeconomic perspective, the stability of Australia’s economic fundamentals is evidenced by its 27 years without a recession, a record amongst developed economies. On the investment front, total returns in Australian retail over the past ten years have exhibited less than half the volatility of those in the US and UK. Such stability highlights the world-class defensive characteristics of Australian shopping centres as long-term, income-producing investments.
Sensible planning policy and collaboration between developers and authorities is increasingly standing out as one of the key features of the Australian shopping centre industry which positions it well compared to other markets. Developers in the US have taken advantage of expansionary planning policy to build around double the shopping centre floorspace per capita of Australia. This has caused supply to outstrip demand (quite considerably), and we are all seeing the consequences play out via wholesale store closures and space handbacks. Australia has done a much better job of matching supply to demand and restricting development to sustainable levels – the result being shopping centres which are more productive for both retailers and landlords. Additionally, collaboration and constructive debate by all stakeholders in the planning process will continue to hold the industry in good stead.
- Retail mix
Planning within malls has also placed Australian retail on more secure footing compared to the US. According to Cistri, 45 per cent of floorspace in US Super-Regionals is occupied by department stores. In Australia, department stores occupy just 25 per cent of space. The ‘anchoring’ of Australian malls is instead more dependent on supermarkets, which provide the benefit of regular weekly footfall that is resilient through economic cycles. The fashion category has been a source of store closures and in the US occupies 65 per cent of Super-Regional specialty floorspace – in Australia it represents 38 per cent. These figures illustrate that Australian retail mixes are already more heavily weighted to growth categories with less e-commerce-related downside. While space rationalisation (and store closures) will occur in Australia, it will be to a much smaller degree than in other markets.
Active management is key
While the fundamentals highlighted above provide a good foundation for Australian shopping centres, there is little doubt we are closer to the end of this real estate cycle than the beginning. As the market tightens and capital growth slows, delivering income growth for investors through quality active management will become more important. With a diverse portfolio spanning fresh food and convenience through to destination experience centres, we adopt a bespoke approach for each asset. However, consistent across the portfolio has been a focus on adaptation to position assets for long-term outperformance. While this adaptation sometimes means making tough calls in the short-term, the results we are seeing across our managed portfolio validate our approach and highlight the importance of having an appropriate strategy backed by a capable and well-resourced platform.
For example, at one of our major centres with a goal to increase weighting to dining and services to respond to customer demand, we have remixed 33 retail tenants over the last two years. Across the remixed retail tenants, we decreased fashion floorspace by 28 per cent and increased dining and services floorspace by 37 per cent. The replacement of underperforming tenants with same-category alternatives, this non-development remixing resulted in sales uplift of over 30 per cent for the remixed stores, a great result for investors and a clear indication that the mix has been more closely aligned to customers’ preferences. This level of sales uplift is consistent with results seen across the portfolio, where active recycling of space has driven an average sales uplift of more than 35 per cent on a like-for-like basis.
At another smaller centre we identified a gap in the mix for a fresh food mini-major. The decision was made to consolidate six specialty units into one site, with the existing retail tenants relocated to other parts of the centre. While this had short-term impacts in the form of capital expenditure and downtime, the relocated tenants have seen a six per cent sales uplift in their new sites and the consolidated space has seen a more than 100 per cent increase in sales compared to the prior configuration. The overall experience of the centre and the offer for customers improved and foot traffic increased.
Focused on customer-centricity
The examples above highlight the importance of active asset management and the effective deployment of capital. But the changes would not have been possible without the support of investors. There are many success stories across the industry and it is incumbent on us to share them, cut through the doom and gloom and show that quality retail assets, managed well, will continue to serve their communities, provide a platform for retail success and perform well for investors. We will certainly be working hard over the year to take our customers and investors on the journey of adaptation and demonstrate the tangible long-term benefits that can be delivered when capital supports strong strategy – it is important to remain in the mindset of what we can do rather than what we can’t.
Adaptation also wouldn’t be possible without the partnership of retailers. We have seen success with new stores, relocations and working with major retailers to deliver refurbishment programs. Despite this, we need to continue to share insights with retailers and partner on campaigns or product launches. Adopting a more collaborative approach with retailers remains a key focus for 2019.
At the same time, we need to continually learn more about end consumers and their evolving needs and preferences. A strong research focus will continue, together with further investments in customer experience and technology.
What can Australia learn from overseas?
While Australia is relatively well-positioned due to its solid fundamentals, we don’t have all the answers and continue to look overseas for learnings and inspiration in several areas.
- Integrating non-retail uses. With the rationalisation of space already a well-established trend in the US, leading shopping centres have been remixing towards less traditional retail uses for some time including health and wellbeing facilities and unique entertainment experiences Australian shopping centres are starting to accelerate a shift towards non-retail uses and case studies in the US help highlight the possibilities.
- Convenience is (often) king. Amazon launched their first Amazon Go store to employees in December 2016. While it took a bit longer than expected to calibrate the technology, it has now been opened to the public and a further eight stores have been rolled out. The premise of the store is frictionless retail – an aspirational goal, but positive customer feedback suggests they are delivering such an experience.
- Bringing online pure plays to bricks and mortar. Top centres in the US are developing a track record of introducing online-first brands into the physical retail world. JLL analysed 100 digital-native brands and found they intended to open 850 stores over the next five years. Making things easier for this new-wave of retailers is an area Australian landlords must pay careful attention to.
Not all retail is equal
While it can be easy to be disheartened by headlines, macroeconomic advantages, a sensible planning system and proactive asset repositioning put Australian shopping centres in a better position than peers overseas, and we remain confident in the sector’s long-term outlook. Despite this, challenges will persist in 2019 and landlords will need to work hard, in collaboration with all customers, to deliver long-term performance grounded in sound strategy and exceptional execution. It is incumbent on us as an industry to continue highlighting the merits of retail and work with investors to encourage ongoing investment which will ensure assets remain relevant and responsive to customer demands in a rapidly changing environment.
This article was also published in Shopping Centre News
While every care has been taken in the preparation of this article, AMP Capital Investors (UK) Limited, Registered Office at Companies House, 4th Floor Berkeley Square House, Berkeley Square, London W1J 6BX (no. 05524536) 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.