Neighbourhood shopping centres have risen to become one of retail’s more attractive investment propositions as they increasingly combine residential infill with the kind of conveniences modern consumers demand.
Once developed as solely freestanding assets, an increasing proportion of neighbourhood centres are now built in conjunction with strata-titled mixed-use developments – so many in fact that CBRE research forecasts they will exceed the freestanding asset class altogether by 2020.
The findings are contained in CBRE’s ViewPoint report released this month Neighbourhood shopping centres: what’s convenience worth? examining capital flows, tenancy mix, investor pricing and development in relation to the investment proposition of a neighbourhood shopping centre.
The bottom line is that these styles of retail centres are on the rise, and landlords must continue to work towards a tenancy mix that provides consumers with optimal convenience. This is now the role of the neighbourhood shopping centre, in a world where regional shopping centres are offering more entertainment and leisure offerings to attract people, and sub-regionals are repositioning themselves as service centres, according to CBRE research analyst Freddie Kareh.
The right mix
Central to their success is the supermarket: compared to regional and sub-regional centres where supermarkets account for only 6% and 18% of total cash flow respectively, in neighbourhood centres they account for about one third of all income.
“The importance of supermarket anchors on the viability of neighbourhood shopping centres is two-pronged,” Mr Kareh said. “In addition to the income they generate, they also drive foot traffic and specialty rents.”
Landlords need also be mindful of the increasing sophistication in supermarket selections when choosing tenants. “With supermarkets repositioning their offerings and bringing more traditional specialities in house – like bakery, butcher, deli and sushi – centre owners need to suitably remix their offerings to prevent undercutting of existing sales, ensuring speciality tenants remain viable,” Mr. Kareh said.
All in all, neighbourhood shopping centres represent a “safe bet” for the investor he said, somewhat protected from the threat of e-commerce and perfectly positioned to provide the convenience demanded by consumers. “Increasing focus on centre amenity will create places where people want to be, driving foot traffic, spend and ultimately rents.”
Seeing first-hand evidence of this style of retail offering’s popularity is CEO of propertybuyer.com.au Rich Harvey. Based in northern Sydney where several such developments have taken place including Stockland’s Balgowlah Shopping Centre and Meriton’s newly opened Lighthouse development in Dee Why, Mr. Harvey said they create community hubs with wide-scale appeal.
“I have a couple of clients right now seeking to exactly this type of investment,’” Mr. Harvey said.
“Neighbourhood shopping centres combined with mixed use developments are proving a good quality investment these days because even though they might at first attract some community opposition when they’re being built, in the end people love them.
“They have a lot of benefits – the apartments they offer are perfect for downsizers who don’t often have a lot to choose from and in doing so free up housing stock in the suburbs for young families to move into.
“Secondly the downsizers and others who move into them have the convenience of being able to go downstairs and have a coffee and socialise, and they can reduce their carbon footprint by leaving the car and doing the shopping in the supermarket.
“They’re also often now being built with office space and there’s a big market for people who want to either work from home or near home.”
Another shift pinpointed by CBRE’s researchers and of interest to investors is a marked convergence in capital values of neighbourhood shopping centres in metro and non-metro regions: since 2015, the average sales price for these centres in metro areas has fallen 23% from $45.4 million to $35.1 million, while in a non-metro area it rose 21% from $31.7 million to $38.5 million.
As a result, the yield spread between metro and non-metro neighbourhood shopping centres is 37bps nationally compared to 93bps in 2015. “given their spreads to other retail investments neighbourhood shopping centres appear undervalued for their risk-adjusted returns,” said CBRE’s associate director of NSW retail investments Nick Willis.