Brands, beauty and bling 28 November 2017

Amazon's impending arrival has generated massive news flow, largely relating to the impact upon local retailers like JB Hi-Fi, Harvey Norman and Myer. With this in mind, CLSA hosted a tour of some larger shopping centres in suburban Sydney to see how the landlords were positioning themselves. While there's different strategies for every centre and management team, the upshot is that every centre is focused upon being relevant to their catchment. "Lifestyle and community" are the drawcards.

The tour visited the north, west and south west suburbs of Hornsby (32km by road from the Sydney CBD), Mt Druitt (51km), Penrith (55km), Wetherill Park (36km), Bankstown (20km) and Roselands (18km). The demographics of these catchments vary but no matter where we went, people were spending. In the markets with lower household income, there was a real focus on "brands, beauty and bling". Hairdressers, shoes and jewellery were performing strongly, with some of the best performing stores nationally for brands like Foot Locker and Platypus. Despite tougher conditions, there were some notable outperformers, with Mt Druitt delivering 36 months of sales growth. Management teams were happy to work with local retailers as opposed to the big nationals and to push the fresh food, market feel. My observations of each centre are below:

Hornsby – the catchment has strong demographics with good household income, high home ownership and some GPS schools down the road. Woolies and Coles sales placed them in their top 5 stores, there was a good "eat street" and fresh food offering, with some shops now catering for the growing Korean and Indian base moving into the catchment.

Mt Druitt – brands, bling and hair very strong. They’ve put some government services inside the centre with customers lined up out the door. Hairdressers have expanded their premises, taking over neighbouring shops. Very busy centre at 10:30am. Interestingly some retail brands have opted not to come to the centre as it could impact their brand, despite it being clear they would do very well. Some development plans in place.

Penrith – presents very well with a strong fresh food element. There's a mix of demographics, with low incomes offset by the high income from nearby acreage properties; for example, Yarramundi. There's been some competition opening up with Nepean Kmart and Cranebrook. The three level Myer now has the top floor set aside for clearance items which seems to be a trend at Myer stores. Quasi Chadstone (Melbourne) feel with curved roof and natural light.

Wetherill Park – a very good food offering and cinemas means that shoppers don’t have to go to Liverpool or Parramatta for entertainment. They do a lot of promotions with the local community. Miguel Maestre (celebrity chef) was hosting a lunch for competition winners when we were there. These type of centres are always tougher to lease given the majors tend to choose Parramatta and Liverpool first, but Stockland have done a good job.

Bankstown – this was built in 1966 and was once Australia's largest shopping centre. To managements credit they showed us the centre, warts and all. It clearly needs capital spent, with the rear bus interchange particularly unappealing. Fresh food, beauty and bling are all doing well and it was very busy mid-afternoon. The centre performs reasonable well and there are medium term opportunities to work with local and state governments given the planned rail upgrade between Sydenham and Bankstown (south west metro). Residential development on/adjacent to the site seems inevitable.

Roselands – it's a great centre for locals as there's no queues and no car parking issues (code for no one there). Quite a fall from grace for a centre that once hosted Frank Sinatra and Roger Moore. Myer claim that this store is performing well but it turns out that this is their internet fulfilment centre, with only a handful of shoppers there when we visited. It's a 40 acre site with a lot of residential potential and management are exploring plans to extract value. The company postponed a $650m revamp earlier this year after it was unable to strike a deal with major tenant Myer, who have a lease until 2026. The centre will still be refurbished but the timing and scope haven't been disclosed.

Myer - there's been two reports from CLSA and JP Morgan analysing the impact of their store rationalisation program. It is relevant given that ~60% of Myers space is within centres owned by AREITs and that Myer has reduced / plans to close stores representing ~11% of its floor space. This will be a drawn out process for Myer given the long leases in place. From a landlords perspective, there is a great opportunity to replace a tenant paying ~$200/m2 with tenants paying at least double. For instance, Myer vacated Scentre Group’s Hurstville centre in January 2015 and the space is now delivering >3x the sales that Myer achieved. They were replaced with a new Woolworths, JB Hi-Fi, Big W, Cotton On and Rebel at higher rents, that underpinned a $105m redevelopment. The downside is that the landlord will have to invest capital to re-tenant the space, they will lose area in the remix (more common areas) and could have downtime in between tenants. Management teams have been working on this issue for many years, with the long terms leases in place providing secure income streams while plans are finalised.

The tour showed that while there's much negativity surrounding retail, it's wrong to assume that all shopping centres are caught in a death spiral. While we do assume lower rental growth for most of our shopping centres under coverage, we have been surprised at consumers' willingness to spend money, particularly on brands, beauty and bling. With Myer just one example of a retailer looking to reduce store count and size, it does seem inevitable that retailers will choose the best centres to trade from. AREITs are fortunate to own the best centres in Australia and will survive the headwinds.

Pat Barrett

Pat Barrett

Investment analyst