This article is from the Australian Property Journal archive
RETAIL property capitalisation rates are now at the highest level not seen for a number of years, topping 7.28%.
And that transition to higher capitalisation rates and the ability to raise capital in the retail real estate sector continues to weigh on shopping centre transactions, which have slumped by more than 50%.
The latest numbers from The Data App showed deals in three months to end of May slumped 52.5% year-on-year, while volumes actually saw a 25% increase, to $575.8 million, but this was buffeted by larger deals.
Capitalisation rates have jumped by 216 basis points to 7.28%, but these continue to be associated with bigger, destination-type shopping centres. Cap rates for smaller everyday needs types of centres, albeit having increase, remain low by historical standards.
“Clearly, the transition to higher cap rates while, more recently, the ability to raise capital, has weighed on shopping centre transactions,” said The Data App director, Rob Ellis.
“With cap rates now the highest they have been for a number of years and implied risk premium on shopping centres a shade over fair value, the number of shopping centres changing hands should pick up. This is assuming a normal or steady state environment.”
“However, with the rise in mortgage rates starting to bite on consumer behaviour, there is every chance retail spending growth could be skewed on the downside; in particular discretionary spending. Under this scenario, the risk premium on retail commercial assets has the scope to rise further.
Ellis noted that the last time cap rates were this level, in August 2015, the cash rate was 2.5% and real yields just above 1%.
“So, while shopping centre transactions should increase as the year progresses, it seems a further cyclical rise in cap rates may be necessary.”
Among the few deals that have landed in recent times are Nikos Property Group’s $134.5 million purchase of a 50% interest in Vicinity Centres’ Broadmeadows Central shopping centre – a deal struck at about 4% above book value and on a yield of circa 6.6% – and IP Generation’s $300 million acquisition of Craigieburn Central from Lendlease and its Australian Prime Property Fund (APPF) Retail. The Australian has reported that APPF is set to sell Far North Queensland’s only regional shopping centre, Cairns Central, for $430 million to McConaghy Properties, having initially hoped for $500 million.
MSCI head of Pacific real assets research, Benjamin Martin-Henry has said price discovery has become more and more challenging for both buyers and sellers, resulting in restraint in the market.
