This will inevitably lead to a shortfall.
The shortage will not be overcome in a hurry because there are few potential shopping centre development sites. Americans are happy to drive across town to a shopping mall some distance from home, but Australians don’t generally like travelling more than one or two suburbs for their shopping trips.
Shopping centres to outperform
At the same time, e-commerce has not had the profound impact on the retail sector that many have been predicting. Australia lags many other nations in e-commerce, with internet sales accounting for less than a fifth of all retail sales.
The lag will probably continue because Australia’s logistics sector is also constrained by lack of space for new developments, which hampers its ability to make timely delivery. And for many Australians, when we want something, we want it now, and we’re often more inclined to go to a shopping centre rather than wait for an online delivery.
All of these factors point to a strong outperformance in shopping centres in the coming years.
We’re seeing the demand playing out. Vacancy rates in shopping centres are low – for instance, Vicinity Centres reported an occupancy rate of 99.1 per cent across its shopping centres in the six months to December 31, the highest rate since COVID-19.
The shortage will inevitably be reflected in higher rents in years to come – indeed, there are signs that retail rents are already rising. Coupled with interest rate cuts, at some point this in turn will drive shopping centre values higher.
Shopping centres are attracting the attention of major investors, which are chasing high returns from assets which were devalued following the pandemic. Private equity funds and institutions are active in the market. For instance, IP Generation bought Stockland’s Glendale shopping centre near Newcastle in regional NSW for $315 million last month.
Private equity is seeking quality centres in regional areas and in city areas where residents aren’t too affected by mortgage stress.
Options for investors
For individual investors looking to cash in on the trend, buying a shopping centre will obviously be beyond their means.
Their best option is to look to listed shopping centre owners or unlisted funds. ASX-listed Scentre owns 42 Westfield shopping centres in Australia and New Zealand and Charter Hall has a listed retail REIT.
Investors can also look at unlisted shopping centre funds involving the likes of Stockland or Centennial. Last month, Centennial teamed up with boutique manager Parkstone to set up a venture with ambitions to buy $1 billion worth of shopping centres. Investors are cautioned to ensure they’re comfortable that unlisted funds’ asset valuations are in line with the market.