Retail A-REITs grow despite economic environment

Slow retail sales growth over the past year has produced a difficult retail trading environment.

Retailer margins are being pressured as low turnover growth and fixed rental increases raise occupancy costs, however retail A-REITs are forecasting nominal distribution yield growth of up to 4% in 2013.

Retail sales growth remains positive overall at 2.6% per annum, although this is significantly below its long-term average of 6.2% per annum.

Department stores and household goods retailers are being particularly affected. Online sales now represent approximately 5.5% of total retail sales and are growing at around 20% per annum.

To date, this has not represented a substantial threat to high-quality shopping centres, and many retail A-REIT managers have adopted strategies to incorporate the effects of online retailing such as purchase collection centres and enhanced personal mobile device technology. The recent failure of the Click Frenzy online sale will have done little to enhance the reputation of the technology to the unconvinced.

Measures of annual turnover growth in the retail A-REITs have generally improved over the year to September 2012, however remain below long term averages at around 1% to 2%.

Fixed rental increases embedded in existing leases are reflected in average rental growth of around 2% to 3% across the retail A-REIT sector.

This contrasts with releasing and new leasing activity which shows reductions in rent of between 1.5% and 3%. Lease incentives, often in the form of contribution to fit out, range up to 20% for five-year terms for some shopping centres, particularly those with a high discretionary retail element or those which do not dominate their catchment areas.

While regional shopping centre vacancies have increased from 0.6% to 1.2% over the past two years, the average vacancy in the retail A-REITs is 0.5% demonstrating the value of active professional management.

The retail A-REITs have been active in capital management, portfolio development, acquisition and disposal in order to maintain and enhance the quality of their portfolios:

• Westfield Retail Trust and Westfield Group have recently undertaken a complex asset swap and restructure of seven Australian shopping centre assets held in joint venture with AMP Capital; 
• CFS Retail Property Trust is developing Emporium, a shopping centre in the Melbourne CBD. Emporium is stage two of a project alongside the refurbished Myer building which is expected to cost in the order of $740 million;
• Charter Hall Retail REIT has recently raised $100 million to fully equity-fund the acquisition of three sub-regional shopping centres at a 2% premium to net tangible assets (NTA); and
• The listing of Woolworths’ proposed new Shopping Centres Australasia Property Group on the Australian Securities Exchange will increase the liquidity and diversity of retail A-REITs. The total value of the retail property portfolio will be in the order of $1.4 billion.

Retail A-REITs provide investors with an exposure to quality retail real estate portfolios and management expertise.

The Shopping Centres Australasia Property Group is likely to yield an income return higher than the retail sub-sector, depending on its final share price.

The additional development return potential from the Westfield transaction should increase its distribution return.

Westfield Retail Trust’s share buy-back will improve its NTA. The subsector should benefit from this acquisition and development activity and result in some share price growth despite the below trend retail trading environment.

Fixed rental increases at rent reviews will largely offset rent reductions at lease renewal while cost efficiencies and low interest rates will cushion slow retail sales growth for retail A-REITs.

Mark Wist is senior asset consultant at Atchison Consultants.