Shopping centres will survive peak Amazon

BTIM’s Davidson and Forrest on how Amazon is reshaping malls

From the Australian Financial Review; by Vesna Poljak; published 12 November 2017 
Reproduced with permission from Fairfax Media

BTIM’s Pete Davidson and Julia Forrest. Photo: Daniel Munoz / Fairfax Syndication

 

When Myer declined to renew its lease at Westfield Hurstville, a Scentre Group shopping centre in NSW, a chill went through the property trust sector.

“They needn’t have worried,” says Julia Forrest, one of the portfolio managers behind BT Investment Management’s listed property strategy. “That space that was doing $30 million is now doing $100 million,” she estimates. “It’s a buzzing centre, it was an amazing opportunity to transform what was an old, tired centre into a food hub with lots of services, some mini-majors, that has just driven traffic through the roof.

“If Myer wants to close some boxes there’s certainly opportunities across the portfolios to really invigorate that space.” As many as 19 of Myer’s 63 stores could close or shrink, the department store has flagged. “I’m sure they’re looking at other spots where maybe Myer won’t renew and are thinking the same thoughts.”

Forrest and Pete Davidson, who is BTIM’s head of listed property, heard the drums beating about Amazon’s arrival in Australia many years ago. And while they do not take the seriousness of this threat lightly, they argue the property sector has not got enough credit for how it is responding.

“This is the long game, it’s probably going to be a 30-year game.”

“What people probably underestimate is the response from the shopping centre industry. The ability to use technology to improve the shopping experience be it parking or be it what’s offered to customers, that’s something that isn’t in the equation at the moment,” says Davidson. “This is the long game, it’s probably going to be a 30-year game.”

Westfield Group, which the fund is overweight, surged last week as global interest in top mall operators returns. New York-listed General Growth Properties was linked to buyout talks with its major investor, Brookfield, but Davidson says sentiment towards Westfield had already been turning.

“There’s been a lot of circling interest in the stock, which needed a catalyst. Most people accept that there’s a great NAV or asset value uplift that’s coming there through the developments such as Croydon, Milan and most recently Century City,” he says. “Also US retail is recovering. Really the market’s just looking for some guidance for next year, which we’ll probably get at the AGM in February.”

However, they do not share the same confidence for “B-grade” office and “B-grade” malls.

‘Shrink more to greatness’

The US mall experience is useful in approximating Amazon’s impact but it is flawed too. American malls do not have supermarkets as anchor tennants because grocers, as they are known, are located on “strip” shops.

“There are some areas of weakness, obviously discount stores and department stores, which are probably going to shrink more to greatness,” says Forrest. “But the generation of foot traffic going to supermarkets – if you’re doing two visits a week, you’re generating a massive amount of foot traffic that you don’t see in the US.”

Davidson thinks the Amazon factor peaked when it acquired Wholefoods. “But if you follow it at the moment, Amazon are actually withdrawing some of their fresh offer across nine states in the US because it’s quite hard to make it work,” he says. “Yes it’s a concern but I don’t think it’s terminal. If you assume that Amazon got 3 per cent share of Australian retail sales in the next few years that’s roughly equivalent to $9 billion, which equates to the sales of Big W.”

Before funds management, Davidson started out as a treasury dealer with Midland Montagu. Forrest was investigating organised crime. They have been at BTIM 23 and 15 years respectively.

The strategy is reducing office exposures, but they note the incredible levels that assets are changing hands at because of the influx of offshore money.

“B-grade office is selling 19, 20 thousand [dollars] a square metre, which is above replacement cost,” Forrest says. Even so, “the [listed] sector’s actually cheaper than buying direct, you can access better quality assets in the sector cheaper than if you were to go to the direct market and you obviously don’t have any transaction costs.

“If you were to go buy an office building on this street [in Sydney’s financial district] you might be paying 4, 4.5 per cent and you can buy a vehicle that may be yielding 5, 5.5 per cent with growth and obviously you don’t have to manage it yourself.”

In New Zealand, they own Precinct Properties and Vital Healthcare, and in childcare, another sector they like, the fund owns Arena and Folkstone. “The working for families initiative means there will be a big release of government payment next year to boost the sector and it’s also defensive and reliable,” Davidson says.

Strong assets

Mirvac is the fund’s largest stock overweight at the moment. It “has got some of the best earnings growth in the sector, very good management team, great ESG, good office portfolio,” Davidson says. Its retail assets are in “really strong urban locations” that are not experiencing as sharp wage pressures as elsewhere in the economy, according to Forrest.

Beyond Westfield and Mirvac, the third main overweight position is Charter Hall, which is exposed to rising asset values in office and industrial.

“Like most property tragics, we end up with phones full of photos of shopping centres,” says Davidson, who scrolls through hundreds of images of shop fitouts and al fresco dining areas.

The discussion has turned to Stockland Wetherill Park in Western Sydney, a property where Stockland has also utilised rooftop solar targeting 1,200,000 kWh annually.

“They’re recreating a little bit of a Melbourne vibe, it’s like a Melbourne laneway in Wetherill Park. And you can do that, it’s got a nice inner-urban feel about it,” says Davidson.

“It’s worth noting they focus a lot on walkability within their new subdivisions so that’s great, you can only admire that. They’re looking at the whole issue of a better sense of community, a better sense of belonging, more exercise and better health outcomes.”

In terms of assets, he also rates highly Scentre Group’s Chermside – “Brisbane’s Chadstone” – and North Lakes, another Queensland attraction. Mirvac’s 200 George Street gets the tick as an innovative office property, and Goodman’s logistics joint venture out at Oakdale is “in some ways the mall of the future”. He has also been to an Amazon distribution centre in Shanghai, which spanned 400,000 square meters or two-thirds of the size of the Pentagon.

“It could be New York, London or it might be Maitland. We’re there.” 

Forrest nominates Westfield London as the best shopping centre in the world, “in terms of curation, presentation, market presence, domination, transport and keeping it relevant and dynamic”. She also recommends the Tramsheds foodhall at Harold Park in Sydney, a Mirvac project linked to its residential development.

“You know you’re passionate about a job when you do it for free, it’s so interesting,” says Forrest. At Westfield Stratford City, another Westfield property in the UK, shoppers can only walk in one direction on the busiest trading days because the mall is so congested, she says.

“We’d categorise the market into fortress malls, and alternatively, safe neighbourhood. It’s the piece in the middle which is a little bit riskier,” says Davidson. “There’s risks there, but I think largely in the price.”

In the next couple of weeks he is going to Maitland to look at a new Stockland shopping centre. “It could be New York, London or it might be Maitland. We’re there.”

 

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