A combination of trophy malls and local convenience centres are best placed to withstand the headwinds that are blowing through the retail sector, according to brokerage and investment firm CLSA.
The wide-ranging analysis of 178 malls comes as the major retail landlords are buffeted by a global turn against the retail sector that is strongest in the US.
"Retail is under pressure from slowing retail sales, increased internet competition, a likely entry by Amazon this year, and a cautious and discerning consumer that is highly leveraged to house prices," wrote CLSA analysts Sholto Maconochie and Stephen Lam in a research note this week.
"But not all shopping centres are equally at risk. Quality and convenience will continue to become more important in this environment, particularly with international and domestic retailers focusing on the most productive locations."
The CLSA analysts describe this as a "barbell" approach. The most productive retail assets are at both ends of the spectrum: the so-called fortress malls, massive suburban shopping destinations and the much smaller neighbourhood centres.
On that analysis, local Westfield owner Scentre and diversified property trust GPT have the highest number of A-grade malls.
"We still believe both international and domestic retailers will be focused on the most productive shopping malls – the Chadstones and Westfield Sydneys of the world," the analysts wrote.
"These strong centres will get stronger, as tenants will pay a premium to be in high-traffic centres, making them more important for other retailers to maintain a presence."
Higher incentives
In that scenario, secondary retail assets will suffer, resorting to higher incentives and potential rent reductions and increased negative re-leasing spreads.
"This may negatively affect operators with a large proportion of second-tier centres – for example Stockland and Vicinity Centres – which may drag down portfolio performance from some of their stronger flagship assets," CLSA said.
The major landlords have been busy redeveloping and refreshing their assets, in a bid to bolster their investments against the challenges of online retail, speciality store collapses and slowing wage growth.
"An online purchase is purely a transaction, whereas shopping is an experience," Mirvac's general manager for retail Justine Hughes said this month.
The remixing of tenancies to respond to changing consumption patterns has been significant. At Vicinity, the space allocated for women's apparel has fallen by 12 per cent, while food courts and eateries have expanded by 20 per cent.
Scentre Group is CLSA's preferred retail property trust in Australia. The analysts note most landlords have wisely chosen to be net sellers in the past five years amid strong prices, in order to improve portfolio quality, redevelop and reduce gearing.
"These retail headwinds may take several years to play out and there will be winners and losers, both retailers and malls," they wrote.
"However, whilst we may appear bearish on retail longer term, we think good retailers and malls will survive and even thrive and the weaker ones will struggle and potentially close, with death by a thousand cuts as they struggle to maintain relevance and profitability."
