Sub-regional shopping centres are losing their allure to increasingly lucrative yields from small neighbourhood shopping centres and heavy investment in large regional retail destinations, CBRE concludes in its latest report on the bricks and mortar retail sector.

Defined as medium-sized shopping centres featuring one or more of Australia’s three discount department stores (DDS), plus a major supermarket and around 40 speciality stores, sub-regional centres are also suffering due to the inconsistent sales figures of two of the country’s major discount department stores in particular.

Combined with the impact of factors hitting the entire retail sector - the rise of online retailing, emerging international brands, pop-up stores and generally weak retail sales growth – their fortunes are now mixed.

But the future is bright if change is embraced, CBRE’s head of research Bradley Speers says, with the success of sub-regional centres depending on two main factors: struggling DDS formats revising their strategies in order to win back market share, and landlords overhauling their retail mix into everything from community services to speciality stores and even entertainment.

Figures show the situation for sub-regional centres is all too clear. “Our analysis indicated that neighbourhood shopping centres are now being priced more sharply than sub-regional centres which are a historical anomaly,” Mr Speers points out.

“Meanwhile, larger landlords are heavily investing capital into regional shopping centres to ensure their ongoing allure to shoppers.”

Separate research by Savills into investment in the sector found that in the12 months to March 2018, $767.2 million of sub-regional transactions ($5 million plus) were recorded nationally, almost half the volumes at the same time last year ($1.49 billion).

In one recent example of how keenly neighbourhood centres are now sought after, a property on the Church St retail strip in exclusive Melbourne seaside suburb of Brighton sold for 60% above reserve in October 2018, similar to a string of purchases of other retail strip assets in the city’s south-east that together set yield, land and building rate records. What’s more, the Church St strip generated at least $31 million in sales over the previous year, according to CBRE’s research.

“Owners and managers of many sub-regional shopping centres will need to work hard in repurposing their centres over the coming years,” Mr Speers says. “They will need to demonstrate awareness of consumer trends, be ahead of the curve in terms of innovation and ultimately mindful of executing their strategies cost effectively to remain viable.”

There are many opportunities and scope to change, too, says CBRE’s national director of retail investments Mark Wizel.  Sub-regional’s size (generally an average gross lettable area between 10,000 and 30,000 square metres or more) allows redevelopment into mixed-use developments – a move that has already been taken by some centres and attracted interest from both onshore and offshore investors, especially Asia. 

In specific circumstances, landlords may also need to accept reduced rents to guarantee tenancies or consider leasing deals with capped occupancy costs.

The executive director of the Australian Retailers Association Russell Zimmerman says he cannot agree more with CBRE’s findings.

“I do believe sub-regional centres are starting to lose their relevancy,” Mr Zimmerman says, “and yes they will have to reinvent themselves. Why do I want to go to a sub-regional when I can find a Woolworths, a Coles, maybe an Aldi at my local neighbourhood centre plus half a dozen shops with the conveniences I need?

“The problem is, if you wanted to buy a pair of shoes, a dress or a formal outfit years ago you could have gone to a reasonably sized sub-regional. But I’ve seen a lot of sub-regionals now where mum and dad operators and those independent retailers offering their services are no longer able to afford the rents.”

Mr Zimmerman advises those involved in sub-regionals to look closely at their leases and reinvent their retail spaces.

“Go back to the basics, review the leases that you have and start putting in some speciality retail that is independently owned and operated,” he says. “Attracting customers and foot traffic comes down to providing awesome service.”

Furthermore, carving up a former DDS shell to accommodate speciality shops could leave landlords with extra vacant space to be creatively repurposed into places such as public libraries or child care centres, CBRE associate director retail investments Nick Willis says.

Regional areas could even see their sub-regional centre transformed into a town-hall style area for hosting events and with open spaces refashioned as faux-auditoriums. Ultimately, landlords are being given an opportunity to redefine their asset as a centre for service, convenience or entertainment, Mr Willis says.

Mr Zimmerman says while not every sub-regional will lose its DDS, says this conclusion is “very much on the mark”. “Doctors surgeries, gyms, medical centres – these are the businesses that will be the new tenants in sub-regionals and where this has happened already it is working well.”