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Competition In The Australian Retail Sector Drives Sale And Lease Back Transactions

Friday, May 10th, 2013

As we all know retail is a fiercely competitive industry and one that is always evolving. Retailers are continually finding new ways to adapt to changing trends in fashion and spending habits, leveraging the power of information through new technologies and refining their business models to get the best competitive advantage. Property has been a big part of this strategy and in this blog I’d like to outline some of the ways retailers are transferring their real estate assets from their balance sheets to institutional investor ownership.

Since the global financial crisis, Woolworths and Wesfarmers have had to develop their own neighbourhood shopping centres and freestanding hardware store warehouses in order to facilitate the expansion of their store networks because there has been a low level of participation by private developers. Private developers have been deterred for feasibility reasons, specialty store leasing challenges and a general low risk appetite, but the retailers have been able to undertake developments at cost or on low margins. As a result, both groups have accumulated substantial property holdings through development and have been undertaking a number of major sale and leaseback transactions.

In 2011, Woolworths sold a portfolio of eight shopping centres to a joint venture between Charter Hall and Telstra Super for AUD 266 million. Then in 2012, Woolworths also completed an initial public offering of a new A-REIT called Shopping Centres Australasia (SCA Property Group) comprising 69 centres that were valued at AUD 1.406 billion.

Bunnings (the hardware store subsidiary of Wesfarmers) sold a portfolio of hardware store warehouses to BWP Trust for AUD 241.71 million in 2011 and a portfolio for AUD 206.7 million to Charter Hall and Telstra Super in 2012. In May 2013, on behalf of Coles (the supermarket subsidiary of Wesfarmers), Jones Lang LaSalle sold a 75% share in a AUD 532 million portfolio comprising 19 shopping centres to ISPT (an Australian superannuation fund). Wesfarmers will retain a 25% share in the portfolio plus management and development rights over the centres. The joint venture also allows for future properties to be acquired as opportunities arise.

Between these five major transactions, a total of AUD 2.52 billion worth of retail assets have been transferred from the balance sheets of these two retailers into the hands of institutional investors. By releasing a large portion of their property holdings, they have been able to unlock capital that can then be re-invested into more productive ventures within their core businesses and fund future store expansion programs.

These recent transactions show there are clearly various structures and options available for retailers looking to sell down real estate holdings and there are a number of other major retail groups reviewing their options. Further, demand from large passive institutional investors continues to strengthen and is making the case even more compelling for retailers to undertake sale and lease back transactions to potentially capitalise on the liquid capital market conditions.

About the author
Andrew Quillfeldt is a Manager and National Retail Analyst in Jones Lang LaSalle Australia, based in Sydney.

Posted in Australia, Investment Research, Retail Research | No Comments »

Refocussed Attention On Sub regional Centres In Australia

Thursday, May 2nd, 2013

An increasing level of attention has been focused on Australian sub-regional shopping centres recently. So what is a sub-regional centre? A sub regional centre is a mid sized mall that consists of at least one discount department store and one or more supermarkets plus a number of specialty shops. According to Jones Lang LaSalle, there is approximately 4.5 million square metres of sub-regional space in Australia’s metropolitan areas.

A diverse range of investors are directing their attention toward this category of retail assets and sales volume has been progressively increasing over the last few years. In Q1/2013 alone, sub regional transactions totaled AUD 546.2 million, equivalent to 56% of total sub regional transactions recorded in 2012.The increasing investor demand is demonstrated by the sub regional assets bought over the last few quarters. From the last couple of sub-regional sales that settled, we have seen:

  • A superannuation fund purchased a portfolio of sub-regional assets across Australia. Over the past two years, the only superannuation fund to have invested into these assets was through a joint venture scheme.
  • Unlisted wholesale funds that have been newly created for wholesale investors to specifically target quality sub regional and neighbourhood shopping centres.
  • A-REITs have been quite active over the last few years in buying sub regional centres because it is part of their current acquisition strategy.
  • A global investor bought a sub regional asset directly in Q1/2013. To gain exposure to the sub regional centres in Australia, international investors have commonly invested indirectly through an Australian unlisted fund. This direct purchase is the first to be recorded since 2009.

    • In addition, landlords commencing refurbishment and extension projects to existing centres and construction of new sub regional centres are another form of investment into this retail sub sector. The sub regional supply pipeline has been gradually recovering from the trough in 2010. Commencement of projects was limited through 2008 and 2009 because project viability was negatively impacted by the challenging leasing environment and the difficulty in obtaining finance. However, project starts in 2012 were 68% higher than in 2011 (on a total square metre basis) and in 2013 may be double the level recorded in 2012, if they commence as scheduled. Major sub regional projects currently under construction include:

  • Craigieburn Central in Melbourne – Lend Lease started their AUD 330 million construction on this sub regional centre (55,000 sqm) in early 2012 and completion is expected to be late 2013. On completion, this centre will be the first brand new sub regional centre to complete since 2011.
  • Cockburn Gateway in Perth – private Perron Group began their AUD 110 million refurbishment and extension (30,000 sqm) to the existing sub regional centre in early 2013.

    • Hence as the retail environment in Australia has been improving, increasing focus is expected to continue to be placed on sub-regional centres, either through direct investment or landlords upgrading or establishing new sub-regional centres.

    About the author
    Anita Tang is a Research Analyst for Jones Lang LaSalle, based in Sydney, Australia.

    Posted in Australia, Retail Research | No Comments »

    Does Your Washroom Sparkle?

    Monday, April 29th, 2013

    I recently attended the presentation hosted by Bank of America Merrill Lynch and the Asia Pacific Real Estate Association titled “My retail is better than yours”. One of the speakers, Adrian Lee, the CEO of Champion REIT, brought up an interesting topic … toilets. He commented that one of his shopping centres, Langham Place, had the cleanest toilets in Mongkok.

    There is little doubt that there will come a time when you are walking along the street and urgently need to pop into a washroom. If we wait, we would definitely choose somewhere clean, such as a hotel or a large shopping centre, because we have a gut feeling that the washrooms in these places will generally be cleaner than public toilets.

    When I was in London, one pleasant surprise while shopping in Knightsbridge, was the visit to the luxurious washrooms at Harrods. Not only are the toilets there clean, but also you can use such famous brand-name products such as Chanel perfume and Dior hand lotion, free of charge. Don’t underestimate how a clean toilet can attract customers; I swung by the macaroon counter in Harrods a couple of times after using their washrooms.

    Not only can washrooms improve customer flow, but also they can have an impact on the shopper’s overall experience. I have a friend who told me about a terrible washroom in a high-end shopping centre where the flush was not working, there was no toilet paper or hook on which to hang her handbag, and the floor was sticky and slippery. She said it was just like another yoga session as she tried to balance and stay focused in a small cubicle. For her, the experience was unforgettable and she is definitely never going back to that shopping centre.

    Women are especially sensitive when it comes to the cleanliness of a washroom and I am prepared to go out of my way to find a clean toilet. Very often, if we see a dirty washroom in a restaurant, it creates such a bad impression that we immediately worry about the state of the kitchen, regardless of how good the food is. So, dirty washrooms can really turn people right off.

    In today’s competitive environment, retailers and shopping centre owners use different tactics to attract customers – some expanding in order to increase coverage and some organising tours to attract Mainland Chinese shoppers. However, cash-rich Mainland Chinese are climbing up the value chain and are looking not only for products, but also for the whole shopping experience. A great shopping experience is one of the main factors that will bring customers back again and again. A small detail like clean washrooms can really enhance a shopper’s experience. It also demonstrates how caring and thoughtful a store owner/shopping centre is. So, make your washroom sparkle.

    About the author
    Joy Wong is a Research Analyst for Jones Lang LaSalle, based in Hong Kong.

    Posted in Hong Kong, Retail Research | No Comments »

    The New Retailers In Town

    Friday, April 5th, 2013

    Last week when I was in London, the city was in the grip of an unseasonable cold snap. Retailers there were complaining about the impact of the cold weather on their sales. The prime retail precincts such as Oxford Street didn’t seem to be much affected though, with plenty of shoppers walking the pavements.

    It’s interesting to compare the retail offer in London with that in Hong Kong, my home town, and Sydney, where I used to live.

    Shoppers are spoilt for choice in London with a wide range of both domestic and international retailers. Home grown brands such as M&S, The Body Shop and Burberry compete side by side with luxury and mass market retailers from overseas. As discussed in our recent European research publication Destination Europe 2013, London has long been a magnet for international retailers attracted by the size, maturity and transparency of the market.

    Hong Kong is some way behind London in terms of international retailer numbers. However in recent years it has seen a surge in new entrants, many hoping to profit from the huge growth in Mainland shoppers visiting the city. In the last year, Abercrombie & Fitch, Breitling and Forever 21 are just a few of the new retailers who have set up shop in Hong Kong.

    Sydney has historically been dominated by domestic retailers, but it too is finally seeing increased interest from overseas. Retailers including Samsung, Topshop and Marimekko have recently arrived Down Under and expansion plans by other international retailers are sure to make for a more diverse and competitive retail environment.

    To find out more about the latest trends in Asia Pacific’s retail hotspots, please take a look at our second edition of Retail Cities in Asia Pacific, released this week.

    About the author
    Dr Jane Murray is the Head of Research, Jones Lang LaSalle Asia Pacific.

    Posted in Asia Pacific, Retail Research | No Comments »

    New Retail Developers Are Getting The Ingredients Right

    Thursday, March 28th, 2013

    On recent trips to Nanjing and Xi’an, I was pleasantly surprised at the high quality of new domestically-developed shopping centres. Wonder City, the West market, and Deji Plaza Phase 2 all seemed to be getting the “ingredients” right for success. These projects were built by relative upstarts – new retail developers without any previous track record or existing retail portfolio – with the exception of Deji Plaza Phase 1. High quality tenants, tasteful interiors, clean circulation, and full ownership by the developer, were just some of the things that were planned well in spite of their recent entry to the industry.

    It wasn’t long ago that high-quality domestically developed shopping centres were the exclusive domain of big national players like Wanda and COFCO. They have taken a decade to perfect their version of what a mass market mall should look like and how it should operate. They understand how and why shopping malls are not the same thing as department stores or street-side shops. They have centralised operations with deep retailer and distributor relationships. In the past few years, their formula for success has been replicated reliably in new centres across the country. Former staff from players like Wanda, as well as foreign mall operators have facilitated the spread of the shopping mall concept far and wide across the country.

    But most importantly, the new upstarts are leapfrogging their predecessors by not repeating the same mistakes. Instead they are looking at the benefits of holding the asset for the long term and making the commitment required to nurture their shopping malls to maturity. Previously, new retail developers almost always followed the fastest path to returns, equating retail with residential: a simple churn formula – build and sell – involving basic shell construction, and strata titling to whomever would buy, with no management of tenant mix or adjacencies. These properties usually went into a tailspin of unsightly decay and even dereliction within a few years.

    Wonder City couldn’t be more different. Sales density figures were respectable for its length of operation, in spite of what seemed to be a complete dependency on shoppers who drive to the centre. Warmly coloured interiors, a rich selection of national and international brands, column free store fronts, good attention to detail, and more importantly, clean restrooms, made the mall a pleasure to walk around in and browse. Even the handrails were sturdy and served more than a decorative purpose. And this is exactly what the creator of the shopping mall concept, Victor Gruen, intended – a place where customers would want to extend their visit and consume more.

    About the author
    Steven McCord is a Local Director in Jones Lang LaSalle’s research team in China, focused on pan-China retail. He is based in Shanghai.

    Posted in China, Retail Research | No Comments »

    Change to the shopping experience in Hong Kong

    Wednesday, March 6th, 2013

    Recently, I visited Hong Kong, a place renowned for its dense population – 7.2 million people in 2012 on a land size of approximately 1,100 square kilometres. Hong Kong is a fast-paced city to which I frequently travel. Like most people that visit this vibrant city, shopping was a very important part of my itinerary. I have not been back for close to two years and I was surprised with the changes to the shopping environment over this short period. In this blog, I am going to share with you my main observations.

    It is no surprise that there is always a crowd wherever you go in Hong Kong. However, although a crowd was to be expected, I was overwhelmed by how much the crowds seemed to have grown from my previous visit. Chinese New Year was probably one reason for the full shopping centres and crowded streets; people were buying enthusiastically to welcome the lunar New Year. But in addition to the Hong Kong locals, the number of people was further boosted by the strong tourist arrivals. According to the Hong Kong Tourism Board, 4.6 million visitors arrived in January 2013. Of these, Mainland China accounted for 76%. Tourists from China are clearly a key driver of retail spending in Hong Kong, accounting for roughly 28% of total retail spending in 1H12.

    Similarly, Australia has also been benefitting from the growing international travel by Chinese tourists. However, they are not yet making as strong a positive impact on retail spending as seen in Hong Kong. The number of tourists from China to Australia has been increasing over the past two years and now accounts for 11% of total inbound tourism as at December 2012. While still a relatively small proportion, the rate of growth is strong (21% p.a. on average over the past two years). The impact on domestic retail spending of tourists from Asia is likely to become more significant over time, although certainly not to the extent I observed in Hong Kong.

    Now that I’m back in Australia and I have re-familiarised myself with the shops along Pitt Street Mall, Sydney, the main difference in shopping experience is the lesser variety of fashion retailers to choose from in Sydney, particularly international and smaller boutique fashion retailers. Although the number of international retailers entering the Australian market has been increasing over the past few years, there are still far fewer international franchise clothing brands to choose from. For instance, there are no H&M, Forever 21 and Abercrombie & Fitch as yet. However, a number of international retailers are reportedly looking to enter the Australian market and this will increase the consumers’ selection.

    About the author
    Anita Tang is a Research Analyst for Jones Lang LaSalle, based in Sydney, Australia

    Posted in Australia, Retail Research | No Comments »

    City Retailing In The Turnover Capital

    Tuesday, January 29th, 2013

    At 9.7% growth year-on-year to November, Western Australia is leading the nation for retail turnover. According to Deloitte Access Economics, this is set to continue in 2013 at an inflationary adjusted rate of 4.3%: the highest growth of any state or territory and notably higher than the national aggregate (2.6%). Furthermore, Jones Lang LaSalle forecasts that Perth’s Regional, Sub-regional and Neighbourhood centres will record higher rental growth in 2013 than their interstate counterparts.

    However retail in Perth’s Central Business District (CBD) is bucking the trend. Jones Lang LaSalle calculated vacancy of 14.9% in December, up from 10.8% in June. This compares with a national CBD December figure of 5.4%. Some of the new vacancies were located in central arcades and around the high-end King Street precinct. Significant vacancy remained in 29,000 sqm of recently-completed fringe development, where fewer pedestrians walk. Disguising a potentially higher vacancy rate were an anecdotal increase in pop-up retailing and the conversion of 2,100 sqm of fringe retail space to office in December.

    Our property Valuers and Managers saw some CBD rents decline by as much as 5.0% in the December quarter. This is the largest decrease since late 1992 which almost directly followed the recession of the early 1990s. Our current rental figures may seem bullish. However the decline does follow the deregulation of shopping hours in August. Non-CBD retailers who were previously unable to trade on Sunday are benefitting economically, to the detriment of the CBD, with increased turnover and strong rental growth expected in 2013.

    The appetite for office accommodation, in Australia’s tightest CBD market, provides challenges for retail in central Perth. In preparation for medium-term office supply in the City Link and Elizabeth Quay precincts, major site works, road closures and traffic diversions are cited by some retailers as impacting adversely on ease of access to the city. While office workers are potential shoppers on weekdays, the resident population per se does not sustain retail demand outside business hours. The Perth local government area has a significantly lower population density than its equivalents in Sydney and Melbourne.

    Will recent trends have a direct impact on the fundamental structure of our CBD retail market? Time will tell.

    About the author
    Anna Garvey is a Research Analyst for Jones Lang LaSalle in Australia, based in Perth.

    Posted in Australia, Retail Research | No Comments »

    The Investment Case of HCMC Retail

    Monday, January 28th, 2013

    Amidst macroeconomic challenges in Vietnam, retail remained one of the country’s better performing sectors in 2012, as noted in our recent publication. So I took a look at how retail in Vietnam compares with that in Indonesia – a current hotspot, from both country- and city-level perspectives. The findings are summarised in the tables below.

    Note: Click here for the full list of sources, methodology and explanations.

    Over the short-term, Vietnam understandably carries higher country-specific risks than Indonesia at present, due to the macroeconomic environment. However, these two countries have fairly comparable demographics, such as population and age profile, as well as income growth prospects, as shown in Table 1. For retail property investors, perhaps an interesting indicator is the projected rise of the middle class – the main target market for prime retail centres. With these demographic prospects, long-term opportunities for retail investment properties apparently exist in Vietnam, as they do in Indonesia.

    Favourable demographics have also paved the way for strong retail volume growth forecasts for both countries. Moreover, both have seen their retail sectors develop more quickly than the overall economy in recent years, signalling short-term opportunities for retail market participants (see Table 1 – Time Pressure).

    Both countries still have relatively low levels of retail “market saturation”, suggesting modern retail sales areas and the penetration of international retailers remain modest. This can also be seen at the city level. As shown in Table 2, both Ho Chi Minh City (HCMC) and Jakarta have relatively low amounts of prime retail property stock considering their population and economic sizes, compared with the rest of Southeast Asia.

    Nevertheless, prime retail property supply in the HCMC CBD has increased 35.0% annually on average over the past three years, from a low base. Meanwhile, the arrival of international retailers, via ownership and franchising, has also been noticeable, partly reflecting increased market saturation.

    Prime retail rents in HCMC are considered high in Southeast Asia, behind only those in Singapore and Kuala Lumpur. This is quite an anomaly since the market remains immature and rents have seen corrections over the last one year. Anecdotally, many international F&B and retail outlets in HCMC are located in street-level shophouses rather than in prime shopping malls where foot traffic and visibility should be higher. Are these indications of a short-term lack of prime retail space?

    If it does, there is room for short-, medium- and long-term investment strategies in the HCMC retail property market. Whether investors rely on market timing to capture excess returns arising from market anomalies or a buy-and-hold strategy to ride on the city’s long-term retail prospects, or both, our local team always works closely with regional Real Estate Intelligence Service (REIS) colleagues to deliver research solutions tailored to investors’ needs.

    After all, it is important to note that HCMC still ranked second behind Jakarta among Southeast Asia’s best cities in terms of retail property “buy” recommendations in the 2013 Emerging Trends in Asia Pacific, after having ranked first in the region in all previous editions.

    About the author
    Trung Thai, CFA is the Manager of Research in Vietnam and is based in Ho Chi Minh City.

    Posted in Economic Research, Investment Research, Investment Strategies, Retail Research, Vietnam | No Comments »

    Will Online Shops Threaten The Existence Of Brick-and-mortar Outlets In Singapore?

    Thursday, December 20th, 2012

    The internet has become a familiar and secure place to conduct transactions, such as e-banking, filing taxes and paying bills, and retail operations can now be conducted online as well. The abundance of online shops and their visual appeal, competitive prices and quality products have made internet shopping increasingly popular.

    To put things into a quantifiable perspective, a study released by PayPal in 2011 indicated that Singapore’s online shopping market conducted SGD 1.1 billion in transactions in 2010 and forecast this figure to reach SGD 4.4 billion in 2015. This sum equals 3% of the total operating receipts generated by Singapore’s retail segment in 2010 and can only be expected to increase given the exponential rise in the usage of smart phones and other online devices since then. In May 2012, Blackbox’s research reported that Singapore’s rate of smartphone penetration stood at 88%, making the city-state one of the most mobile-savvy nations in Southeast Asia.

    A recent survey conducted by our research team highlighted three key factors that made online shopping attractive to consumers in Singapore. Of all the respondents, 84% quoted the generally cheaper prices of online products that attracted them to internet shopping, while 73% quoted the wide variety of products that can be found online, and 55% quoted the prompt delivery service of most internet shops as an important factor. The survey also uncovered that consumers were generally willing to compromise having a physical contact when making their purchases (42%). This was particularly true for the purchases of small-ticket fashion apparel (77%) and electronics (62%).

    It is unlikely that the traditional retail shops could be put out of business by these online shops, at least not in the foreseeable future. The online purchases reportedly were confined to small-ticket items priced below SGD 100 (73%), and the majority of the purchasers bought products online less than once a month (67%). In addition, 97% of the respondents still preferred to shop in traditional retail malls suggesting a strong appetite for physical interaction still exists among local consumers.

    However, this definitely does not mean that owners of brick-and-mortar shops should rest on their laurels. A daunting 47% of the respondents have restricted their purchases of certain product types to only online outlets. As the experience and security of online shopping is further enhanced in the future, the types of products that consumers buy and their threshold price could easily expand. In addition, when asked if retail malls still attracted them, 47% of the respondents remained neutral. A product of prudent use of space to maximise returns, the cookie-cutter layout of local malls has perhaps caused consumers to become unexcited with these traditional outlets.

    As a certain proportion of the consumers still prefer the tactile experience before purchasing, traditional retail malls will likely remain relevant in the coming years but the local retail scene could benefit from a major reinvention to enhance shopper sensory experience and retain these shoppers. Online outlets could then be used to complement these brick-and-mortar shops by helping retailers reach a larger market, free up space by selling small-ticket items through the internet and provide a truly holistic retail experience.

    About the author
    Clement Chua is the Research Analyst for Singapore at Jones Lang LaSalle.

    Posted in Retail Research, Singapore | No Comments »

    The Changing Landscape Of Retailing In Guangzhou And Shenzhen

    Friday, December 14th, 2012

    Recently, two well-known domestic “hot-pot” restaurant chains announced plans to open their first restaurants in Guangzhou. What was interesting was the different strategy adopted by each of the two. One operator chose to open its first restaurants in Tee Mall and Sky Galleria, both established malls located in Tianhe CBD while the other opted to open in Starlight Walk, a new decentralised mall located in Haizhu district, an area where mid-tier retailing is still only just emerging. At the same time, an international fast-fashion retailer revealed plans to open their first new boutiques in Shenzhen in Futian CBD and Houhai in Nanshan, two nascent retailing areas in that particular city.

    Many people have asked me why more retailers have started to establish their footprint in emerging retailing areas since the traditional strategy adopted by most, has been to build up brand awareness in well-known locations before expanding outwards into peripheral locations. I believe that there are several reasons for this emerging trend.

    Firstly, it is worth noting that some of the emerging retailing areas in Guangzhou and Shenzhen are in, or closer to, the homes of the city’s growing middle-class, an obvious target demographic for most retailers. In Guangzhou, districts such as Haizhu and Panyu are becoming increasingly popular in the eyes of retailers because their catchment areas not only include local residents but also those from neighbouring cities. In Shenzhen, the growing middle-class in districts such as Bao’an and Longgang has driven developers and retailers to invest in these areas.

    Secondly, the completion of new higher quality shopping malls in emerging suburban areas is providing more viable choices for retailers. For both Guangzhou and Shenzhen, over 50% of all new retailing floor space due to be completed in the market over the next five year is located in emerging retailing areas. The new shopping malls being built are changing the landscape of retailing in these areas. Instead of the traditional retail podium format (as part of a larger residential or mixed-use development), a greater number of new shopping malls are now being built as stand-alone developments and are not only of higher build quality but also better managed.

    Last but not the least, establishing a footprint in emerging retailing areas helps retailers achieve economies of scale. Though retail sales growth in Southern China has more recently started to stabilise, rents in traditional prime retailing areas continues to steadily rise, largely as a result of the supply-demand imbalances in these areas. These imbalances not only put upward pressure on rents but can also impede on the real estate plans of retailers, which is crucial for new market entrants seeking to expand their retailing network quickly over a short period of time. In contrast, the availability of new supply there and lower rentals in emerging areas can help mitigate some of these risks.

    Moving forward, I expect this new strategy of new market entrants shunning traditional shopping areas to establish and grow their business in emerging retailing areas to gather further traction.

    About the author
    Silvia Zeng is the Senior Manager of Research for Jones Lang LaSalle in Guangzhou, China.

    Posted in China, Retail Research | No Comments »

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