Convenience culture drives neighbourhood shopping centre value

From 2020, the number of new neighbourhood shopping centres developed as part of strata titled mixed-use developments will exceed those constructed as freestanding assets for the first time on record.

This is one of the forecasts in CBRE’s new ViewPoint research report; Neighbourhood shopping centres: What’s convenience worth?

Whilst neighbourhood shopping centres have traditionally been developed as freestanding assets, the rise in residential infill development has resulted in an increasing proportion of neighbourhood shopping centres being developed as part of strata-titled mixed-use developments. 

Once considered an inconvenience by many residential developers, the retail component of mixed-use developments has become a point of difference in a changing market, according to CBRE’s ViewPoint. 

The report is the second instalment of CBRE’s Australian shopping centre report series, following the release of Sub-regional shopping centres: a case of middle child syndrome? in Q4 2018. 

The latest report provides an overview of the investment proposition of a neighbourhood shopping centre by looking at capital flows, investor pricing, tenancy mix and development. It benchmarks neighbourhood shopping centres across metro versus non-metro locations, and versus freestanding supermarkets and Bunning’s Warehouses.

CBRE Research Analyst, Freddie Kareh, said that; “As regional shopping centres seek to drive foot traffic through the provision of entertainment and leisure offerings, and sub-regionals reposition as service centres, the need for neighbourhoods to strengthen their identity as convenience-based centres is as relevant as ever.”

In Australia, supermarket, grocery and liquor retailing accounts for approximately 40% of the circa $320 billion retail trade industry. Whilst supermarkets account for only 6% and 18% of total cash flow in regional and sub-regional centres respectively, in neighbourhood centres, they account for approximately one third of total income.

“The importance of supermarket anchors on the viability of neighbourhood shopping centres is two pronged. In addition to the income they generate, they also drive foot traffic and specialty rents,” Mr Kareh said.

“With supermarkets repositioning their offerings and bringing more traditional specialties in house – like bakery, butcher, deli and sushi – centre owners need to suitably remix their offerings to prevent undercutting of existing sales, ensuring specialty tenants remain viable.”

CBRE’s Director of Australian Retail Investments, Mark Wizel, said the online revolution and rise of e-commerce had already wrought major changes to successful centres in terms of tenancy mix, which has had very positive results. 

“There is no doubt that online sales have driven sweeping changes to the traditional retail offering at shopping centres. With increasing pressure on returns, we are going to see more owners shift focus to food and beverage and service and entertainment offerings designed to increase dwell time and, ultimately, retail spend,” Mr Wizel added. 

Since 2015, there has been a noticeable convergence in capital values of neighbourhood shopping centres in metro versus non-metro locations, with the average sale price for neighbourhood centres in metro locations falling 23% from $45.4 million to $35.1 million. By contrast, the average sale price for neighbourhood centres in non-metro locations has risen 21% from $31.7 million to $38.5 million over this same period. 

Nick Willis, Associate Director of CBRE’s NSW Retail Investments team, explained; “As a consequence of this, the yield spread between metro and non-metro neighbourhood centres has now converged to 37bps nationally, down from 93bps in 2015. This trend has been driven by elevated levels of capital looking further afield in search of higher returns. Given their spreads to other retail investments, neighbourhood shopping centres appear undervalued for their risk adjusted returns.” 

“Whilst the retail landscape is changing, neighbourhood shopping centres are relatively insulated from the overarching threat of e-commerce and well positioned to capitalise on the growing consumer demand for convenience,” Mr Willis said.

“In addition, their non-discretionary based tenancy mix will see them remain attractive to investors who continue to focus on stability of income at this point in the cycle.”