To most Australians, shopping centres exist for one reason, to make you poorer. Ever since the introduction of the credit card in 1951 and more recently, Buy Now Pay Later, shopping centres have become a national sport.
However, for the sharp investor, shopping centres can make a great addition to your portfolio. In today’s article, I will be discussing several businesses in the real estate sector that manage, develop, and operate shopping centres around Australia.
Going to the shops
Like most Australians, shopping centres are a part of daily life, from Woolworth’s weekly shop to Christmas shopping in David Jones. Simply put, the shopping centre is a way of life. While online shopping becomes more prevalent in Australia, with 80.8% of Australians purchasing online, only 10% of products purchased in Australia are purchased via e-commerce retailers. Whilst the shopping centre industry may see an increase in competition, it will only benefit us as consumers and investors more as firms create new business strategies to retain a competitive advantage, evident in the increase in dining options, gyms and facilities being introduced in shopping centres to diversify and capture a greater target market.
Shopping will always be a way of life. However, a consequence of COVID-19 is the rapid and almost permanent shift to online shopping.
Re-opening of the economy generates opportunities
COIVID hammered shopping centres, and thus SCG, SGP, VCX and SCP suffered a nasty decline. However, stimulus checks, and the fact that people are craving the need to socialise and interact should see supermarkets jam-packed. Thus, extreme shopping activity should see investor confidence behind shopping centre stocks return. Because of when shops re-open rental profit should increase and shopping centre stocks are set to recover from their undervalued positions (opinion not advice).
Who are the key players?
The shopping centre sector is mainly dominated by a few key players including:
Scentre Group (ASX: SCG) operate 42 shopping centres across Australia and New Zealand with a portfolio value of $56 billion. Scentre Group operates its stores under the ‘Westfield’ name and operates shopping centres such as Westfield Hornsby, Westfield Parramatta, and Westfield Chatswood.
Stockland (ASX: SGP) operates 35 retail centres across Australia with a portfolio value of $6.9 billion and focus on smaller local shopping centres. Stockland operates centres in locations such as Forster, Nowra, Cairns and other regional locations. Unlike the other companies mentioned, shopping centres are not Stockland’s main stream of revenue with Stockland also focusing on residential development, commercial real estate development and retirement home development and operations.
Vicinity Centres (ASX: VCX) own or manage 64 retail centres across Australia with a portfolio value of $26.3 billion. Vicinity Centres operate the Chadstone Shopping Centre, the largest mall in Australia and the Southern Hemisphere. VCX also operate all DFO centres, providing a competitive advantage in the factory outlet retail space. VCX operate centres such as Chatswood Chase, Carlingford Court and DFO Homebush.
Shopping Centres Australasia (ASX: SCP) operate 91 retail centres, 85 of which are in Australia with a portfolio value of $3.2 billion. SCP focus on smaller neighbourhood shopping centres in suburban to regional Australia, often being the only shopping centre in a given location providing SCP with a competitive advantage.
A comparison of financials
Before I start, I am obliged to remind our viewers that this not advice, only general commentary from my extensive research into this area.
Is the shopping centre industry worth the investment
Due to COVID-19 all stocks mentioned above are trading at a discount of between 25% – 45%. Making now a potentially good time to jump onboard. (opinion not advice). The companies mentioned above all pay out a healthy dividend far exceeding the REIT industry average of 5.5%.
Due to Australia’s geographic location and lack of e-commerce infrastructure, the ability for firms such as Amazon to impede on the shopping centre sector is a long-term instead of short-term. The diversification of shopping centres to become retail, lifestyle and dining hubs should increase their competitiveness and attract customers in the long term. Also, high real estate prices in Australia, should see shopping centres in urban areas i.e. Chatswood increasing their profits.
Despite the fairy tale story, we must discuss the negatives. Here at YIG, we believe every investor should have a balanced perspective and not lured into speculative stocks.
In light of COVID-19, shopping centres have been hit greatly by tenants failing to pay rents, leading to a decrease in cash flow in the short term. COVID-19 also forced smaller ‘mom and pop’ stores to close their doors for good, increasing the vacancy rate in malls across the country.
Furthermore, increasing unemployment will lead to a decrease in discretionary spending, further impacting stores such as Target which are already closing or rebranding stores.
Lastly, the increase in e-commerce may further erode at shopping centres market share in the long-term.
Despite the rise of e-commerce, the shopping centre still has an important place in Australia for the short-term. Thus, shopping centres appear an attractive investment. (opinion not advice) Shopping centre’s may struggle in the future but retail stocks are incredibly low, making now a good time to invest. (opinion not advice)
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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Marlon Ferguson, Associate of YIG.