The yield conundrum for Australian Shopping Centre assets

Permanent versus temporary changes that have been initiated by the Global Financial Crisis and what these mean for Australian Shopping Centre owners

April 10, 2013

SYDNEY, 10 APRIL 2013 – A recent report by Jones Lang LaSalle titled, Strategies for the new ‘normal’ provides a real estate outlook and identifies a range of changes – some of them permanent or structural, others short-term or cyclical, which have been initiated by the Global Financial Crisis (GFC). The report highlights what these changes mean for real estate owners, investors and tenants.

At a Jones Lang LaSalle Research event in Sydney, Australasian Head of Research and Consulting Dr David Rees said that five years on from the GFC, the Australian Retail investment market had returned to something close to ‘normal’ market conditions. Yields for regional and sub-regional shopping centres  were close to long term benchmarks, while capital values for regional centres were close to the 2007 peak.

“An analysis of national retail yields for Q4 2012 shows regional shopping centres were 6.32%, not far from the 10-year average of 6.39%.  Similarly, sub-regional centres came in at 7.67% in Q4, compared to the 10-year average of 7.47%.  However neighbourhood centres were wider, at 8.51% in Q4 compared to the 10-year average of 7.96% and as a sub-sector, neighbourhood centre capital values have so far shown only a modest recovery since the trough in 2009,” said Dr Rees.

While the direct retail real estate market has rebounded, a number of conundrums remain for owners and prospective investors: 

• The gap between property and real bond yields is close to historic highs. This reflects the fact that global and Australian bond yields are close to multi-decade lows. This gap is unsustainable, the report argues;
• The gap between regional and neighbourhood centre yields is at a 10 year high. This poses the question of whether neighbourhood centres are being too heavily discounted in the current risk-averse environment;  
• The yield spread within property types such as sub-regional and neighbourhood centres is becoming wider. Investors have become more discerning between strong and weak performing shopping centres, while the wider spread provides incentives for owners to upgrade and reposition centres.

“One of the major trends that we are seeing across the entire commercial property market is the gap between property and bond yields.  What this means for the retail sector is that Australian shopping centre assets are presenting good value compared to bond market yields which are at multi-decade, even multi-century lows. With spreads between real estate yields and real bond yields close to all-time highs, the best value, judged by this benchmark, is currently in neighbourhood centre assets,” said Dr Rees.

Australian Head of Retail, Property and Asset Management, Tony Doherty noted that Jones Lang LaSalle Research shows that yield spreads for all retail property types - regional, sub-regional and neighbourhood shopping centres -are much wider now than they were pre-GFC in 2007.  This demonstrates that investors are discerning between the performance of shopping centres.

“Retail property has become a more complex asset class as a result of both cyclical and structural factors weighing on the sector. The heightened level of competition in the industry has highlighted the need for strategic asset management and active property management to drive shopping centre performance. We expect there will be a strong focus on refining the diversity of tenant mix and refurbishing and expanding existing assets as market conditions improve,” said Mr Doherty.

“Despite month-to-month fluctuations, the broad trend in retail spending is encouraging,” said Dr Rees. “While the February retail sales data just released may be a temporary spike, retail spending has been on a rising trend since mid-2011.”

Note to Editors:
The classifications of shopping centres are below for reference:

CBD: The main commercial centre of a metropolitan area. Retail forms found within the CBD include strip shops, enclosed arcades and very large shopping complexes.
Regional Centres: Major centres that are department store based (Myer, David Jones). These centres often contain more than 200 specialty shops and several other major tenants.
Sub-regional Centres: Centres that are discount department store based (eg Kmart, Target, Big W and Harris Scarfe).
Neighbourhood Centres: Enclosed centres containing a supermarket and specialties.
Bulky Goods: The sale of low cost/high bulk goods, such as furniture, electrical goods and building products. May be freestanding, in enclosed centres or within retail warehousing parks.