Retail investors eye economic headwinds

With memories of the pandemic still fresh, retail property investors are moving as quickly as possible to bring their real estate in line with what shoppers want.

The timing couldn’t be more important, with economic concerns beginning to crimp spending power, according to a recent discussion on the topic among landlords.

“One of the key lessons we learned from COVID-19 was to acknowledge the role shopping centres can play in the life of consumers,” said Anne Macsporran, fund manager at Lendlease, speaking at the Malls of the Future Summit in Sydney, Australia, in March.

“It’s not just a place where they can go and buy a pair of shoes. Consumers want a place where they can feel connected to their communities where they can come, dine, socialise, be entertained, sign their kid up for soccer,” she said.

This is pushing retail investors to reinvent retail. “Mixed use” is the new buzz-phrase, creating assets that give customers more than shopping as a reason to visit a post-COVID world of community activities, co-working and office spaces, hotels, even childcare and medical.

Investors are also learning from the recent history of retail, particularly in the U.S.. Australia’s more stringent rules and regulations have prevented the advent of U.S. shopping “ghost towns”, malls built in the middle of nowhere with no reason for people to shop there, said Christine Kelly, deputy fund manager, head of retail finance at Charter Hall Retail REIT.

“Retail as an asset class is well controlled,” said Kelly. Australian landlords are “a lot more cognisant of the fact that the changing needs of consumers means they don’t necessarily want a new wing on a shopping centre, that they might just want a better mix or a different type of mix.”

The latest test of retail’s resilience is at the macro level, with high inflation, cost-of-living pressures and higher debt costs putting discretionary spending under pressure.

Australian Bureau of Statistics (ABS) figures showed the volume of retail sales fell for a second straight quarter in March, with the decline accelerating to 0.6 per cent, from a 0.3 per cent fall in December.

“Outside of the COVID-19 pandemic period, this is the largest fall in retail sales volumes since September 2009,” Ben Dorber, ABS head of retail statistics, said.

Retail sales volumes for household goods retailing fell 3.7 per cent, the fifth consecutive fall. Consumers continue to spend less on large discretionary purchases in this industry, which peaked in the December quarter 2021 with higher demand during COVID-19, according to the ABS.

Convenience-focused retail assets are likely to be somewhat insulated from the slowdown in spending, according to Simon Dyer, retail asset manager at Centuria Capital Group. Centuria’s “bread-and-butter” business is in neighborhood, convenience-focused services, “a pretty safe sort of space.”

 “A contraction for us in consumer spending is probably going to benefit a property like ours where someone having one less meal out a week, one more meal in means that the supermarket and those other ancillary retailers do quite well,” he said at the event.

In terms of the outlook for income growth, the convenience sector is well-placed, Simon Baird, deputy fund manager at super-fund backed developer ISPT. Baird said a new and emerging trend to keep an eye on was the role convenience assets will play in new energy generation and storage.

While higher inflation and rising interest rates are a challenge to a retail sector still recovering from COVID lockdowns and supply chain disruptions, there could be some mitigating factors such as a high household savings rate from COVID-19 stimulus payments, a strong labour market, and the return of international students, migrants and tourists to Australia.

Centuria’s Dyer mentioned the accumulated wealth of savings from COVID payments as one factor that spending isn’t quite as subdued as seems at the moment: “Anyone in the CBD on a Tuesday, Wednesday or Thursday night will struggle to get a booking at restaurants,” he said.