Higher vacancy rates create a buying opportunity for Westfield

Vacancy rates in shopping centres and retail strips have risen significantly since the beginning of the year as consumer confidence remains low.

The retail vacancy rate has risen from 3.5% at the beginning of the year to 4% by the end of June, which Jones Lang LaSalle attributes largely to weakness in the CBD retail sector. According to figures from the investment management group, the vacancy rate in the CBD sector climbed from 5.4% to 6.7% for the first six months of the year. Furthermore, The Australian Financial Review highlighted that empty space in sub-regional malls had risen from 2.8% to 3% whilst the rate in regional malls had fallen from 1.3% to 1.2%.

Although vacancy levels had fallen in regional malls, analysts said this was due to short-term leasing in many centres. The group said that “leasing activity is rising, reflecting the higher rate of tenant turnover that is currently occurring as landlords go through the slow process of optimizing their tenant mix.”

The higher turnover rate is bad news for shopping centre operators such as Westfield Group (ASX: WDC) and GPT Group (ASX: GPT). With retailers struggling with low consumer sentiment, the landlords have been forced to decrease their rent rates by around 0.7% for the first half of this year in order to attract new tenants, which will likely impact on profits.

In addition to diminishing consumer sentiment, the rapid expansion and increasing popularity of online retailing is also affecting the brick-and-mortar sector in a negative way. Analysts at Morgan Stanley stated that “we believe investors need to be aware that retail is no longer purely a low-risk, high-return asset class.”

Foolish takeaway

The current vacancy issue will likely only affect landlords in the short-to-medium terms, and long-term investors should recognise this as an opportunity rather than a hindrance. Westfield is at the forefront in its industry and, with its growth potential and focus on shareholder returns, presents as an excellent opportunity. Trading at just below $11.40 per share and offering a 4.4% dividend yield, shares are currently selling at a 9% discount compared to its levels in May.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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