m3commentary SHOPPING CENTRES

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1 m3commentary SHOPPING CENTRES Spring 2016 Key Research Contacts: Jennifer Williams National Director NSW (02) Erin Obliubek Research Manager VIC (02) Casey Robinson Research Manager QLD (07) Zoe Haskett Research Manager SA (08) Janis McLaren Research Analyst WA (08) m3property.com.au P1

2 CONTENTS Market Overview 3 Key Retail Influences 4 Occupier Demand 5 Key Indicators 7 Significant sales 9 Outlook 10 RETAIL SECTOR SET TO IMPROVE AGAIN Retail trade, while positive, has slowed over the year to July 2016, with all major retail categories witnessing slower growth than over the previous 12 months. Consumer sentiment remains volatile. Rental growth was positive over the six months to June 2016, but slower than the six months prior. DEFINITIONS Regional: Major shopping centre typically incorporating at least one full line department store, a full line discount department store, a supermarket and around 100 specialty stores. GLA is over 30,000m 2. Includes Super Regional, Major Regional and Regional centres. Sub Regional: A shopping centre generally incorporating at least one full line discount department store, a major supermarket and around 40 specialty stores. GLA typically 10,000-30,000m 2. Neighbourhood: Local shopping centre generally containing a supermarket and specialty stores. GLA typically less than 10,000 square metres. Investor demand was solid, however, retail sales activity has slowed over the year to June 2016, compared to the year prior. Owners look to hold prime assets and dispose of noncore assets. Sales over the year to June 2016 totalled over $5,052,418,800. Yields across prime retail centres continued to tighten over the year to September 2016, with further tightening likely in the short term. m3commentary Spring 2016 P2

3 MARKET OVERVIEW Mixed conditions continued for retailers across Australia over Low interest rates and the volume of capital chasing assets have kept purchaser demand positive, while structural and cyclical changes, residential market differences, employment conditions, volatile global markets and mixed sentiment continued to challenge retailers. The short term outlook, however, remains relatively positive with an interest rate cut yet to take full effect and improving residential building approvals and house price growth. The m3property Shopping Centre report focuses on retailer and investment activity in Regional, Sub Regional and Neighbourhood centres in Australia. As expected, key retail tenant demand drivers have faced a number of challenges over the first half of 2016 resulting in a sharp slowdown in retail trade. m3property is, however, forecasting an improvement in conditions over the second half of the year. This is largely on the back of the official interest rate cut in August 2016, which has started to drive an improvement in the residential sector and will, in turn, improve the prospects for the retail market as both the wealth effect and increased disposable income flow through to spending. Rental growth slowed slightly over the first half of 2016 to 3.3% compared to 3.6% over the previous six months. Occupancy costs rose slightly to 14.06% in June 2016, from 13.97% as at December Investment activity was solid, however, the volume of sales fell over the year to June 2016 in the Regional and Neighbourhood centre types. The third quarter has started strongly having already reached over $384,800,000 worth of sales up until the first week in September. Prime Regional shopping centres continue to be tightly held. The limited number of prime centres and their high capital value ensures the ownership base is relatively shallow. Owners are reluctant to divest interests in assets as opportunities to re-enter the market are scarce. The divestment of partial interests is more common than that of total interests. This allows owners to retain exposure to the asset class and management rights, whilst also taking advantage of strong purchaser interest to raise capital to fund development pipelines. Yields for shopping centres across the major retail A- REITs firmed by 35 basis points over the year to June 2016 to average 6.15%. m3property Valuation The Emporium Melbourne Shopping Centre, Victoria. m3commentary Spring 2016 P3

4 KEY INFLUENCES $ ECONOMY While economic challenges remain, headed by global uncertainty, changing exchange rates and volatile equities markets, there are also positives. According to the Australian Treasury, Gross Domestic Product (GDP) is forecast to grow by 3.25% in , after reaching 3.28% seasonally adjusted over the year to June 2016 (ABS September 2016). RETAIL SECTORAL CHANGES The retail sector continues to adjust to cyclical and structural changes. The changes are resulting in regional variations in spending and a transformation in the way we purchase goods and services. These influences are likely to continue to drive regional differences in retail growth during 2016 and into CONSUMER CONFIDENCE The Westpac-Melbourne Institute Index of Consumer Sentiment has improved overall in the past six months despite remaining volatile. The index is currently at in September 2016, just above a net balance of 100 (where optimists outweigh pessimists). The September and August survey results were muted considering the August survey took place either side of the August official rate cut by the RBA, which usually results in a sharp increase in sentiment. RETAIL BUILDING APPROVALS The value of retail building approvals in 2015 has for the fourth consecutive year exceeded long-term average levels as retailers have looked to keep their offering fresh in the changing retail environment and to meet new technology requirements. While building approvals have slowed over the first seven months of 2016, retail development activity is still expected to remain robust in the short term due to approvals from 2015 still being actioned. POPULATION Moderate population growth continues to underpin the retail sector despite volatile consumer sentiment and fairly weak wages growth. Australia s Estimated Resident Population (ERP) as at 31 March 2016 was 24,051,400 people reflecting an annual increase of 327,600 (1.4%). The fastest population growth in the year to December 2015 was Victoria (1.9%), followed by NSW (1.4%) and ACT and Queensland (both 1.3%). RETAIL TURNOVER National retail turnover during July 2016 was approximately $25,014,900,000. Growth from July 2015 to July 2016 was 2.7%. Total retail spending growth from the yearending June 2015 to the year-ending June 2016 was 3.6%, decreasing from 4.6% growth from the year-ending June 2014 to the year-ending June All sectors experienced growth over the past year. The strongest growth was recorded in the Clothing and Soft Goods sector (5.6%). m3commentary Spring 2016 P4

5 OCCUPIER DEMAND DEPARTMENT STORES After six years of weak retail trade in department stores, the segment improved over 2015 with 4.5% growth. However, retail trade growth has again become more volatile in this segment over The July 2016 retail trade result has indicated a major fall of 6.2% for department stores. Myer is the largest department store (with 62 stores and an estimated $3,260,000,000 in revenue ), followed by David Jones (41 stores with an estimated $1,910,000,000 in revenue ), according to IBISWorld (August 2016). Myer is currently rationalising stores and focusing on refurbishment of existing stores. Myer plans to exit their Wollongong, NSW store in October 2016, their Orange, NSW and Brookside, Queensland stores in January 2017 and Logan Hyperdome in 2018 on lease expiry. They are also not proceeding with new stores originally planned for Coomera, Queensland and Tuggerah, NSW. David Jones is also looking to refurbish a number of existing stores and to introduce a high end food offering for a number of stores including Bondi Junction and Sydney in NSW, followed by other suitable stores including stand-alone outlets. continued focus on price and growth in transactions and units sold. Kmart expanded its store network over the year to June 2016 to total 209 stores by opening six new stores. Wesfarmers have announced they are looking at options to convert underperforming Target stores to Kmart stores, although no rebranding occurred in the year to June Target saw comparable store sales decrease by 0.4% over the year to June Like many other large retailers, Target have continued their store renewal programme, with at least ten stores launched in the new format over the year to June Target have increased their network to 306 stores. BIG W, at June 2016, had 186 stores. The chain has been undergoing major changes to try and turn around its performance including a new CEO and deflation of prices. Like for like store sales growth was reported as declining by 3.3% in the year to June Two new BIG W stores were opened in the year to June MINI MAJORS The mini majors category is typically defined as retailers who occupy space ranging from 400 square meters to 1,500 square meters within a shopping centre. Although traditionally dominated by Australian retailers such as JB HI-FI and Rebel Sport, international brands, in particular fashion and technology retailers, are fast becoming major players in the mini majors segment. A number of international brands such as Zara, Uniqlo, Sony and Samsung are currently in an expansion phase, focusing their attention towards centres located along the eastern seaboard. In January 2016 Dick Smith was placed into administration, the company s failure was largely due to poor inventory control and a costly store expansion. The entrance of international retailers to this segment will provide consumers with a wider product range and assist in the absorption of potential store vacancies moving forward. m3property Valuation: Roselands Shopping Centre, New South Wales. DISCOUNT STORES DEPARTMENT Discount Department Stores (DDS) include Kmart, BIG W and Target. This retailer segment competes largely on price and has benefited from the shift in consumers preferences for low-cost goods. In particular Kmart has catered well for this shift in consumer behaviour. In the year ended 30 June 2016 Kmart s store comparable sales grew 10.5%. This result reflected a m3commentary Spring 2016 P5

6 OCCUPIER DEMAND SUPERMARKETS Woolworths (Woolworths, Safeway and Thomas Dux) (34.1%), Wesfarmers (Coles and BI-LO) (30.1%) ALDI (7.9%) and Metcash (IGA and Supa IGA) (7.2%) are the major supermarket chains operating in the competitive food and grocery market (IBISWorld September 2016). Other independent supermarket chains include: Foodworks, SPAR, Costco, Harris Farm, Foodland, Tong Li, etc. Wesfarmers reported food and Liquor sales growth of 5.1% in its June annual report. Wesfarmers have continued to reshape their supermarket store network opening Coles stores and closing BI-LO s. Coles added 20 supermarkets and closed nine over the past 12 months to total 787 supermarkets as at the end of June A further 53 stores were refurbished. Woolworths have announced that they will be closing around 30 stores, deferring 20 more stores, with a further 20 stores are under review and cutting jobs as part of its current restructure to implement a new operating model. From opening its first Australian store in 2001 in NSW, ALDI now has an estimated 7.9% market share according to IBISWorld, (September 2016). ALDI s revenue is expected to reach an estimated $8,027,400,000 in the 2016 calendar year, which would represent a rise of 25.7% compared to the previous year (IBISWorld September 2016). ALDI is currently in the process of opening around 70 stores in WA and 50 stores in SA (a process that is now well underway). ALDI is expected to remain a major driver of supermarket competition going forward. IGA and Supa IGA, owned by Metcash, have lost significant market share in recent years due to robust competition and fewer stores compared with their competitors. It was estimated that Metcash Limited s (IGA segment) revenue was $7,532,400,000 in up 0.3% compared to the year prior (IBIS World September 2016). Metcash operates around 1,365 IGA stores nationally. Metcash s (IGA segment) has a 7.2% market share in Australia according to IBISWorld (September 2016). SPECIALTY STORES The entrance of new retailers or expansion of existing retailers has offset the loss of some specialty retailers over 2015 and into 2016, keeping vacancies low. Recently retailers such as GNC Livewell s Australian arm; Koko Black, Laura Ashley s Australian arm, ABC Shop, and Eagle Boys Pizza became insolvent, went into administration or have started closing stores. In total 731 insolvency reports have been made in the retail sector in the year to May This exceeds the previous year by 6.7%. On the other hand, specialty stores such as Burger Project, Hairhouse Warehouse, Lord of the Fries, Decjuba, Dyson and Freshii plan to expand or set up operations in Australia. m3property Valuation: Sunshine Plaza, Queensland. m3commentary Spring 2016 P6

7 Sales volume ($billions) 3.0% 2.9% 2.7% 2.6% 2.9% 3.5% 3.5% 3.6% 3.3% Vacancy rate (%) m3property Research KEY INDICATORS Retail A-REIT Australian Vacancy Rate 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% VACANCY The average reported vacancy rate for the major retail A-REIT owned centres was 0.91% as at June 2016, down from 1.26% in June While the overall downward trend in vacancy is likely to be the same, centres owned by the major A-REITs are typically core assets that are actively managed and therefore the broader market vacancy is likely to be higher. Source: Annual A-REIT reports and presentations and m3property (September 2016) Retail Centre Rent Growth RENTS Rental growth averaged 3.3% across the major shopping centre s, owned by A-REITs in Australia over the year to June This was slightly weaker growth than over the six months to December 2015, which averaged 3.6%. Source: Annual A-REIT reports and presentations and m3property (September 2016) INVESTMENT DEMAND Retail Sales Volume, by Centre Type Regional Sub Regional Neighbourhood Source: m3property Research (*to end August 2016). Sales over $5 million Shopping centre investment demand has remained strong. Sales activity in Regional centres was low in the 12 months to June 2016 due to owners looking to hold onto these assets. Sub Regional sales activity, on the other hand, increased significantly with $2,919,730,000 sales recorded over the year, an 82.4% increase on the 2015 financial year. Neighbourhood centres sales activity reduced by 32.3% to be just over $1,935,688,800 over the year to June Overseas investors accounted for the majority of shopping centre sales over the 12 months to June 2016 with 37.7% of total sales, A-REITs increased activity significantly over the year, accounting for 23.1% of sales, the next largest share over the 2016 financial year. Blackstone Group accounted for the largest number of shopping centre sales over the 2016 financial year, followed by Vicinity Centres and Mirvac Group. A-REITs were the largest vendor category selling 44.6% of shopping centres by value. They were followed by private investors with 16.1% of sales. Shopping centre sales activity was dominated by the three most populous States, Queensland (30.8%), Victoria (26.7%) and NSW (26.4%). m3commentary Spring 2016 P7

8 KEY INDICATORS INVESTMENT YIELDS 10.00% Prime (prime and super prime) IRRs (%) 8.00% 6.00% 4.00% 2.00% 0.00% Average market yield (%)12.00% Source: m3property Research Shopping Centre Market Yields Regional centres Sub Regional centres Neighbourhood centres Regional centres nationally would have seen prime yields firm by an average of around 25 basis points over the year to September 2016, driven by the low cost of capital, continued investor demand and improvement to stock via the refurbishment and extension of a number of regional centres. The strong demand for other major centres such as World Square, The Shops at Ellenbrook and MidCity support this view. Regional centres now typically range from 4.50%-7.00%. Due to continuing strong investment demand, yields for Sub Regional centres have tightened over the year to September 2016 by an average of around 25 basis points. These centres now typically range from 5.50%-7.50%. The strength of investor demand for Neighbourhood centres drove a tightening of yields over the year to September 2016 of around basis points to range from 5.25%-7.50%. Neighbourhood yields vary more than the other centre types due to the variation in trade areas and population growth within their catchments. 8.50% 8.00% 7.50% 7.00% 6.50% Regional Sub Regional Neighbourhood 6.00% Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Source: m3property Research Shopping Centre Prime IRRs m3property Valuation: Riverside Plaza, New South Wales. INTERNAL RATES OF RETURN With demand for retail assets remaining strong, investors reducing return expectations and the ten year bond rate (risk free rate) falling, retail shopping centre IRRs have tightened. We expect that investor return expectations are likely to continue to reduce in the short term. IRRs are therefore set to remain tight in the short term and may see further tightening for super prime and prime quality assets. Prime (super prime and prime) IRRs, as at September 2016, ranged between 6.75%-7.75% for Regional centres, 7.00%- 7.75% for Sub Regional centres and 6.75%-8.00% for Neighbourhood centres. m3property Valuation: Deepwater Plaza, New South Wales. m3commentary Spring 2016 P8

9 SIGNIFICANT SALES TO DATE Property Date Price Annandale Central Shopping Centre, Annandale, QLD Market Yield Centre Type Purchaser Aug 16 $33,500, % Neighbourhood SCA Property Group Hilton Plaza, Hilton, SA Aug 16 $19,200, % Neighbourhood Fort Street Real Estate Capital Jimboomba Junction, Jimboomba, QLD Jul 16 $27,480, % Neighbourhood SCA Property Group Laurimar Shopping Centre, Doreen, VIC Jul 16 $27,000, % Neighbourhood Private Investor Monier Village, Darra, QLD Jul 16 $23,900, % Neighbourhood Private Investor Runaway Bay Shopping Village, Runaway Bay, QLD (50%) Jun 16 $160,000, % Sub Regional Perron Investments Pty Ltd Woolworths Cornubia, Loganholme, QLD Jun 16 $38,250, % Neighbourhood Private Investor Port Mall Shopping Centre, Port Adelaide, SA Jun 16 $14,800, % Neighbourhood Private Investor Keppel Bay Plaza, Yeppoon, QLD May 16 $28,100, % Neighbourhood Pimpama Junction Shopping Centre, Pimpama, QLD Real Asset Management (RAM) Pty Ltd Apr 16 $38,400, % Neighbourhood Private Investor Please contact one of our Retail Valuer s for detailed sales analyses. m3property Valuation: Lakeside Joondalup Shopping City, Western Australia. m3commentary Spring 2016 P9

10 OUTLOOK SHOPPING CENTRES Retail floor space supply is set to increase over 2016, given high levels of building approvals, ongoing redevelopment and repositioning of assets. Supply, however, is likely to slow over the medium term. The Federal Government is forecasting household consumption to grow by 3.00% in (Economic and Fiscal Outlook, Budget ) due to continued low interest rates and the wealth effect of increased house prices. Retail trade should therefore also strengthen. With low interest rates continuing, wealth levels remaining high, a lower Australian dollar and a gradual transition to non-mining sectors, a sustained rebound in consumer confidence is expected. While improving, it remains fragile due largely to international volatility, driven largely by the reduction of Chinese growth and debt levels and instability in the European Union in Europe, and local job uncertainty, particularly in mining reliant States. Further yield compression, albeit slight, is expected in the short term with the cost of capital remaining low, investor demand solid and the weight of capital continuing to flow into property. It is expected that investor demand will remain strong in the short term. Activity, however, is largely dependent on the availability of assets. KEY RETAIL VALUATION CONTACTS Heath Crampton National Director NSW (02) Shaun O Sullivan Director VIC (03) Samantha Macann Associate Director QLD (07) Susan Visser Director SA (08) m3property provides national coverage in all States and Territories. info@m3property.com.au Gordon Jeanes Director WA (08) DISCLAIMER m3property Australia. This report has been derived, in part, from sources other than m3property. In passing on this information, m3property makes no representation that any information or assumption contained in this material is accurate or complete. To the extent that this material contains any statement as to the future, it is simply an estimate or opinion based on information currently available to m3property and contains assumptions which may be incorrect. m3property makes no representation that any such statements are, or will be, accurate.