The difference in yields between small neighbourhood shopping centres and sub-regional malls has widened to its largest in a decade, driven by the uncertain prospects hanging over major tenants at the larger retail sites.
Yields, which run inversely to value, have risen to 7.5 percent for sub-regional malls, while for neighbourhood centres they have sharpened to around 6 per cent, the largest gap in almost a decade according to research by the PAR Group.
Investment yields for those retail property types as well as for large-format retail outlets were roughly similar at the start of 2019. After spiking across the board in an initial response to COVID-19, yields from larger format facilities and neighbourhood centres sharpened, while for sub-regional malls they have gone in the other direction.
Weighing on the valuation of sub-regional malls, and pushing yields higher, are the headwinds faced by some of their key tenants: discount department stores and national fashion chains.
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On the other side, as the trends toward working from home and home renovation accelerated through the pandemic, investor demand for large-format retail centres rose.
The increasing spread of yields across mall types is a clear illustration of the diverging fortunes of different parts of the retail property world, according to PAR, a research collective comprising Real Investment Analytics, the Data App and Y Research.
“Just as consumer spending behaviour has changed, so has the demand for commercial retail space,” the researchers wrote in their analysis.
“The appetite for convenience, neighbourhood and large format centres has remained solid, while transactions of large shopping centres has been more subdued. This change in shopping centre demand has been reflected in the valuation parameters.”
The research shows how large format retail centres – the type run by listed players Aventus and Home Consortium – have matured in recent years into institutional grade assets, with yields tightening from nearly 12 per cent in 2012-13 around 5.5 per cent.
At the same time, recent sales highlight the risk premium attached to sub-regional centres with a number of centres sold on 8 or 9 per cent yields. Even so, the extent of that premium is starting to look attractive for some investors as yields sharpen elsewhere in commercial property. Some logistics assets, for example, are commanding yields in the low 4 per cent range.
Last month, Elanor Investors Group, backed by Savills Investment Management, acquired a Toowoomba mall for $145 million on a 7.9 per cent yield. Its owner, private equity giant Blackstone, had bought the sub-regional mall for around $188 million or less five years earlier.
“Institutional owners have been active sellers, reducing their portfolio of these assets at rates resembling a race to the door,” the report on the PAR analysis, conducted by Y Research’s Damian Stone and the Data App’s Rob Ellis, said.
“Whilst previously institutional owners fought over sub-regional centres, particularly in non-metropolitan locales, the race seems to be to offload these centres to a diminishing pool of potential purchasers.”
Further softening in yields is likely as the sales evidence from post-COVID-19 deals flows through to book values of listed entities, according to the PAR team. In turn, those potentially lower asset values could trigger further sales.
“Neighbourhood centres, underpinned by supermarkets and a manageable number of specialty stores, are being perceived by investors as far less riskier assets,” they wrote. “The defensive nature of these assets and changing consumer trends will likely see neighbourhood centres retain their values in 2021.”
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