A SURPRISING resurgence in retailing is underway in the real estate industry as shopping malls reset around food and entertainment, fending off the threat of online vendors.
E-sports computer gaming, gyms, childcare centres and even car dealerships are driving a renaissance at shopping malls, which are emerging strongly from 18 months of pandemic restrictions and lockdowns.
Pendal’s Julia Forrest, a portfolio manager specialising in property for the Australian equities team, says during the reset forced on the sector by COVID-19 retailers closed unprofitable stores and optimised staffing levels.
It also forced landlords to the negotiating table to reset rents at lower but more sustainable levels for the long term.
“The retail sector is probably in a better position now than it was at the beginning of 2020,” says Forrest.
Amid further lockdowns across the country and the threat of a resurgence of the pandemic, the strong outlook for retail is an important and unheralded theme for portfolio construction.
Before the pandemic, the retail sector was under pressure. Sales growth was falling, shops were cutting shifts, discounting was on the rise and some retailers were closing or going into administration.
“We went into 2020 expecting rents to fall but for completely different reasons than COVID,” says Forrest.
“But the rental reset in 2020 was somewhere between 12 and 15 per cent lower.”
“You can be more certain about the cash flows with retailers going forward.”Julia Forrest
The lower rents, coupled with government subsidies for wages, the closure of less profitable stores, higher productivity as staffing levels were reset and a move to online and omni-channel retailing, has put the sector in a better position than many expected.
At the same time, strong demand for other property assets like office and industrial has improved the relative attractiveness of malls for investors.
“You can be more certain about the cash flows with retailers going forward.”
Forrest says shopping malls are adapting well to the threat of online shopping, moving to an omni-channel approach and lifting the experiences available at a mall.
“There’s e-gaming that has opened in one of the centres in Victoria that’s drawing in young teenage boys, which isn’t the typical target market for malls.
“They are adding childcare centres to the periphery. They’re starting to add car dealerships and things like car care and parts – the kind of thing that you’ve seen in the bulky goods category or large format retail are now moving into malls.”
Forrest says investors should keep an eye on the big asset sales in the pipeline to gauge how valuations are changing.
“The AMP assets, Pacific Fair and Macquarie Centre will probably trade, and they’ll probably trade close to book value.
“That’s a reflection of capital seeking best quality assets with good locations and optionality from repurposing.”
Julia has managed Pendal’s property trust portfolios for more than a decade. She has 25 years of experience spanning equities research and advisory, initial public offerings and capital raisings.
Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.
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