Investors likely know Scentre Group (ASX: SCG) as the owner of more than 40 Westfield shopping centres across Australia and New Zealand, but according to a new research report from Wilsons Advisory, there are other elements of its business that make its story even more compelling.
That's not to discount the importance of its core retail real estate business, however.
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Destination centres a drawcard
While e-commerce has played a growing role in the retail economy in recent years, Wilsons says Scentre has successfully developed its sites to offer strong experiential offerings.
This has kept demand for the retail footprint at its centres strong, which is also supported by "strong population growth and steadily rising household income''.
As Wilsons says in its report:
While e-commerce is reshaping the retail landscape, 'destination' centres are increasingly valued for their experiential offerings – including dining, entertainment, and leisure – which cannot be replicated online. Destination malls not only drive foot traffic and enhance brand visibility for retailers, they also support last-mile logistics and serve as strategic hubs in integrated omnichannel strategies.
There is also a high bar to entry to compete with Westfield, with retail footprint supply constrained by high construction costs, strict planning rules, and the scarcity of well-located land.
This has resulted in replacement costs that comfortably exceed current market valuations. Consequently, the development pipeline for new shopping centre space is very limited, with no new regional shopping malls currently under construction in Australia.
Wilsons says this combination of high demand for retail tenancies and constrained supply is expected to drive a shortfall of retail space of about 1.1 million square metres by 2030, "supporting high occupancy levels, growth in retail turnover, and steady rental growth for high-quality shopping malls such as Scentre Group's portfolio of Westfield centres''.
Surprising growth driver
There's also another, less obvious reason Scentre Group is attractive, the Wilsons team says, and that is its potential for residential development growth.
This is because the company owns plots of land, some of which are under-utilised, adjacent to its centres, which tend to be in densely populated areas.
Wilsons says the company "could unlock significant value from its existing portfolio, while also helping address Australia's housing shortage''.
Management has recently lodged State Significant Development applications at Burwood (Sydney) and Warringah (Sydney), as well as received rezoning approvals at Hornsby (Sydney) and Belconnen (Canberra), collectively enabling about 7,500 dwellings.
Wilsons says alongside these projects, Scentre maintains a $4 billion development pipeline, including major projects at Bondi and Southland, providing "significant embedded earnings and valuation upside''.
Then finally there's the company's dividend yield, which at 4.5% is well above the S&P/ASX 200 Index (ASX: XJO) average of 3.2%, Wilsons says.
Wilsons has included Scentre in what it calls its Focus Portfolio, and says the shares could trend higher from current levels.
As they say in their report:
We believe Scentre Group deserves a premium to the broader Australian real estate investment trust sector given its best-in-class asset portfolio, favourable sector positioning (i.e. pureplay exposure to positive retail fundamentals, zero office or hospital exposure), and above-sector growth profile. Therefore, we see scope for the stock to re-rate higher from current levels.
Scentre shares are currently changing hands for $4.01, valuing the company at $20.9 billion.
