Sub-regional shopping centres need to evolve: CBRE

Sub-regional shopping centres need to evolve: CBRE

14 December 2018

Sub-regional shopping centres are experiencing the retail version of “middle child syndrome”, lacking the investment being poured into regional centres while investment yields indicate investors prefer smaller neighbourhood centres, says a new CBRE research report.

The report concludes that sub-regional shopping centres will need to evolve to remain relevant in the Australian retail landscape.

CBRE’s Head of Research, Australia, Bradley Speers said the rise of online retailing, expansion of international brands and pop-up stores and relatively weak retail sales growth had presented challenges across the board for bricks and mortar retail assets.

However, CBRE’s new report Sub-Regional Shopping Centres: A Case of Middle Child Syndrome? concludes that sub-regional centres have suffered the most, given the inconsistent sales growth recorded by two of the country’s three main discount department store (DDS) retailers.

“This impacts sub-regional shopping centres the most because one-fifth of centre turnover is generated by discount departments stores – which don’t feature at all in neighbourhood shopping centres and represent closer to one-tenth of the turnover derived by regional shopping centres,” Mr Speers said.

“This turnover risk is being reflected in investor pricing. Our analysis indicates that neighbourhood shopping centres – underpinned by their relatively secure income profile, which focuses on food and convenience – are now being priced more sharply than sub-regional centres, which is a historical anomaly. Meanwhile, larger landlords are heavily investing capital into regional shopping centres to ensure their ongoing allure to shoppers.”

CBRE’s report concludes that the future success of sub-regional shopping centres depends on two key factors: struggling DDS formats adjusting their strategies and winning back market share and landlords changing the retail mix within their centres.

It focuses on the opportunities presented by a retail remix and the ways in which landlords can employ asset management initiatives to increase foot traffic in their centres and ensure they not just survive, but thrive.

One strategy proposed is repurposing DDS space and bringing in alternative types of tenants focused on more service-based offerings.

CBRE’s analysis highlights that discount department stores in sub-regional shopping centres make up, on average, around one-quarter of total floor space and have an average size of 6,750sqm.

However, the gross rent they generate per square metre is approximately 15% of that produced by specialty shops.

Using those metrics, just ten additional speciality shops, averaging 110sqm in size, would be required to recoup rental income lost by a discount department store vacating.

Bearing in mind that some GLA would be lost in carving up the former DDS shell to accommodate specialty shops, CBRE Associate Director, Retail Investments, Nick Willis said landlords would still be left with roughly 5,000sqm of space that could be creatively repurposed to enhance the overall appeal of their shopping centre.

“While some sub-regional shopping centres may be faced with discount department stores either vacating or shrinking their footprint, this presents an opportunity to landlords to redefine their asset as a centre for service, convenience or entertainment,” Mr Willis said.

Indeed, CBRE’s report forecasts that the proportion of services in sub-regional shopping centres will double within five years to account for approximately 25% of total GLA.

As retailers reduce footprints, opportunities also exist for sub-regional centres to support alternative, community uses such as public libraries and child care to leverage off existing infrastructure and population catchments.

In regional locations, sub-regional centres could also potentially become the destination for town hall events if they could transform open spaces into faux-auditoriums.

CBRE National Director of Retail Investments, Mark Wizel said that due to sub-regional centres occupying large plots of land, there was also opportunity to redevelop and transform some centres into mixed-use developments – which was attracting interest from both onshore and offshore investors, particularly from Asia.

“Asian capital is being drawn to sub regional assets due to their underlying land value and future development potential,” Mr Wizel said.

“There is no better example of that trend in play than the recent sale of Burwood One Shopping Centre in Melbourne for $181,5000,000. The yield, which was near on 5%, clearly highlights the longer-term vision that the successful Shenzhen property investor has for the asset.”

Harnessing big data to better understand customers will be another must for sub-regional centre landlords wanting to create a competitive advantage.

In specific circumstances, landlords might also need to accept a reduction in rent to guarantee tenancies or consider leasing deals with capped occupancy costs.

“Sub-regional shopping centres might rightly feel like the middle child at present: seemingly unnoticed, a bit unloved and needing to try a little harder to be heard and recognised,” Mr Speers concluded.

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