Why reports of a retail apocalypse are exaggerated

Despite all the online gloom, retail investments continue to perform strongly, but not all retail assets are created equal, finds latest data from the Property Council/IPD Australia All Property Index.

The Index, prepared by MSCI Inc, analyses nearly 1,0 assets and 48 funds with a combined value of $192 billion.

Australian retail returns have been lower than non-retail returns, but have remained steady, posting 10.1 per cent across all retail in the 12 months to December 2017.

But there is a “clear distinction visible” in the underlying performance of retail centres, says MSCI’s executive director Maarten Broek.

Super and major regional centres recorded a 10.3 per cent return, growing from 9.0 per cent the previous year.

“Super and major regional shopping centres are the strongest performers, driven by cap rate compression as a result of recent transactions in a market where there hadn’t been transactions for a while,” Broek says.

“This indicates that a clear interest remains from investors in Australia’s largest shopping centres, which are not just places to buy goods, but are being positioned as ‘retail experiences’,” he adds.

Neighbourhood retail centres have also performed “very well” in the last few years, Broek adds. While returns fell from 12.1 in 2016 to 10.1 per cent in 2017, Broek says the solid result confirms that “if there’s any concerns on the impact of e-commerce on non-discretionary spending, it hasn’t impacted investor returns at this stage”.

However, regional and sub regional shopping centres have not fared as well. Regional returns dipped, to 7.7 per cent, from 9.2 per cent the previous year. Sub-regional returns fell to 9.7 from 10.3 per cent.

Retail performance is still healthy, with Broek arguing that “capital growth remains positive across all shopping centre types”.

Large format retail is also performing well “on the back of nationwide housing market growth”.

MSCI’s latest research follows the publication of a new retail insights report, Retail apocalypse: should mall owners be worried?

This finds only a “modest difference” in the total return performance of retail versus non-retail real estate investments in the United States. Over the five years to September 2017, the annualised total return for retail assets was 10.4 per cent, compared to 10.0 per cent for non-retail assets.

Broek says the United States, with the largest per capita retail footprint in the world and the home of e-commerce giants like Amazon and Walmart, presents an intriguing case study.

“Despite the inexorable rise of e-commerce over the last 20 years, retail asset performance has been surprisingly resilient, providing stable returns.

“With a limited impact on performance to date, recent doom-and-gloom predictions may have overstated the current stresses facing retail property investors,” Broek says.

“But not all assets are equal, and the changing retail environment means that portfolios must be well managed to be positioned for the transition underway.”