Will the 'resurgence in demand' for shopping centres boost ASX REITs?

ASX REITs are likely to benefit from the "triple boost" of Australia's population, jobs, and income growth.

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Three of the biggest ASX 200 real estate investment trusts (REITs) are shopping centre specialists.

The No 2. ASX REIT by market capitalisation is Scentre Group (ASX: SCG), which owns 42 Westfield malls in Australia and New Zealand. Scentre shares closed at $3.12 yesterday, up 9.86% over the past year.

The No. 3 ASX REIT is Stockland shopping centre owner, Stockland Corporation Ltd (ASX: SGP). Stockland is one of the largest retail property owners, developers and managers in Australia. It owns Stockland malls in many metro suburban and regional locations and also operates in the residential and logistics sectors.

Stockland shares closed at $4.54 yesterday, up 0.44% over the past 12 months.

The fourth-largest ASX REIT is Vicinity Centres (ASX: VCX). It owns 57 retail assets including Chadstone in Melbourne, the Queen Victoria Building and Chatswood Chase in Sydney, and QueensPlaza in Brisbane.

Shares in Australia's second-largest listed retail property manager closed at $1.91 apiece yesterday and are down 6.83% over the past 12 months.

CBRE tips rising rents and demand for retail spaces

CBRE, a global leader in commercial real estate services and investment, says there is a "resurgence in demand" for Australian shopping centres currently underway.

Despite the growth in e-commerce, CBRE forecasts that shopping centre investment volumes will grow by about 50% from $4.2 billion in 2023 to an estimated $6.3 billion in 2025.

CBRE Pacific Head of Retail Capital Markets, Simon Rooney, said Asian investors and European Pension Funds are interested in investing in Australian shopping centres because, "Australia offers a rapidly growing population, with rising incomes, which is unique in an OECD context."   

CBRE says Australian shopping centres are a "lucrative investment" due to resilient retail spending, a tight supply of land to build new centres, and low vacancy rates due to demand for space from retailers.

This would likely lead to higher rents and capital growth.

Retail spending in 2023 totalled almost $425 billion, 60% higher than a decade ago, said CBRE.

Despite high inflation, retail turnover increased by 0.8% over the 12 months to December 2023, according to the Australian Bureau of Statistics.

CBRE says the "triple boost" of strong population growth, low unemployment, and meaningful wage growth would drive retail spending to a forecast $500 billion per annum by the end of this decade.

There is also a supply squeeze for shopping centre space, which could lead to rising shop rents.

CBRE estimates there will be 0.78 million square metres of future shopping centre supply available from 2024 to 2028. It says this is less than half the historical average, and vacancy rates within centres are low.

In a recent report, CBRE said:

We see scope for rents to continue to grow as vacancy tightens and shopping centres continue to generate foot traffic.

Australian shopping centre vacancy is currently sub 5% and we anticipate further vacancy rate compression as city centre performance improves.

CBRE noted that the types of retailers wanting shop space are changing from specialty stores to mini-major retailers. Examples of mini-major tenants include Chemist Warehouse, Cotton-On, JB Hi-Fi owned by JB Hi-Fi Ltd (ASX: JBH), and Rebel Sport owned by Super Retail Group Ltd (ASX: SUL).

ASX REITs see improved re-leasing spreads

CBRE says retail occupancy costs in regional and sub-regional shopping centres have declined over the past three to five years due to reduced rents and higher retail sales growth.

CBRE said:

We view this as a favourable outcome, providing scope for rents to re-grow over time.

Between 2017 and 2023, retail REITs witnessed an enhancement in re-leasing spreads after facing significant declines associated with the disruptions caused by the COVID-19 pandemic.

In the February earnings season, ASX REITs Vicinity Centres and Scentre reported increased earnings.

Vicinity Centres reported a statutory net profit after tax (NPAT) of $223.5 million for 1H FY24. That was up 27% from H1 FY23, with increased occupancy to 99.1%.

Scentre reported a 16.7% lift in profit after tax to $1,069 million for full-year FY23, with occupancy of 99.2%. Scentre completed 3,273 leasing deals that included 307 new brands.

Average specialty rents increased 7.5% and new lease spreads improved to +3.1%. The ASX REIT collected $2,723 million of gross rent during the year, up $131 million compared to 2022.

Scentre Group CEO Elliott Rusanow said:

Customer visitation to our 42 Westfield destinations for the year was 512 million, up 32 million or 6.7% on 2022. This was underpinned by our activation program which included new strategic partnerships with leading brands Disney, Live Nation and Netball Australia.

As a result, our business partners achieved $28.4 billion in sales, an increase of $1.7 billion or
6.4% compared to 2022 and representing a record across our Westfield platform.

How shopping centres are changing

Sheree Griff, CBRE Pacific's Head of Retail Property Management and Leasing, said customers were increasingly using online stores for research before attending physical stores to 'try before they buy'.

She said:

E-commerce is not a threat to shopping centre investment; more importantly it is the other way around.

Retailers find the e-commerce engagement for their products is higher when they have a physical store in a shopping centre.

Consumers research products online then enter the store well-educated and knowing what they are looking for.  

The in-store experience is about validating the product and ensuring it's at the quality, sizing, and colour that the consumer expects.

Shopping centres are changing their look and feel and trying to create leisure and recreation experiences alongside shopping.

Griff said:

Retailers are now creating in-store experiences to attract the consumer to stay longer and purchase more. Engagement shopping could be cooking schools, a basketball court within a sports store, or premium customer service where the consumer feels special.

Brokers say buy ASX REITs

Barrenjoey raised its rating on Vicinity Centres shares to overweight a fortnight ago. It has a 12-month share price target of $2.20 on the ASX REIT, implying a potential 15% upside.

Citi has a buy rating on Stockland shares with a 12-month price target of $5.20, implying a potential 14.5% upside.

The consensus rating on Scentre shares among analysts on the CBA platform is a moderate buy.

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Super Retail Group. The Motley Fool Australia has recommended Jb Hi-Fi. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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