‘Resilient’ neighbourhood mall values up 20pc in a year

Convenience mall values have surged 20 per cent this year on the back of a pandemic-led boom in local shopping, a surge of private capital into the sector and their growing status as last-mile logistics hubs, the latest valuations by the country’s biggest owner of the asset class show.

SCA Property Group, which owns 97 neighbourhood and sub-regional malls anchored by supermarkets and liquor stores, recorded a 9.7 per cent or $384 million like-for-like valuation increase between June and December, after recording a 9.5 per cent or $323 million rise over the previous six months of the calendar year.

Combined with $416 million of acquisitions, SCA lifted the value of its portfolio over the 12 months to December to $4.66 billion from $3.4 billion, a rise of 37 per cent.

Over the same period, average capitalisation rates – or yields across its portfolio – tightened almost 100 basis points to 5.4 per cent, a reflection of the heightened demand for the asset class, especially from private investors, who have paid the sharpest prices over the past 12 to 18 months.

As an example, a freestanding Woolworths supermarket in Melbourne’s eastern suburbs sold for $29.3 million on a 2.46 per cent yield in October, while a new-format Coles supermarket in Melbourne’s inner suburb of Hawthorn went for $24.5 million on a record low yield of just 1.9 per cent.  Both were bought by local investors.

“People like the convenience retail sector, especially high-net-worth investors who own and are buying a lot of them,” SCA chief executive Anthony Mellowes told The Australian Financial Review.

There was also growing institutional investor interest, Mr Mellowes said, as seen in SCA’s new $750 million joint venture with Singapore’s sovereign wealth fund GIC that will invest in metropolitan convenience retail centres across Australia through an unlisted vehicle.

“These are very resilient assets that are performing very strongly,” he said.

Neighbourhood and sub-regional malls, typically anchored by a major supermarket and located close to large suburban populations, traded strongly throughout the pandemic, part of a sub-sector of retail assets now referred to as “essential services”.

They have also benefited from the growth of online shopping, with many now doubling up as last-mile logistics hubs for click-and-collect groceries ordered online.

By contrast larger, destination malls, which have a higher proportion of discretionary tenants and are more negatively impacted by online shopping, suffered valuation declines during the pandemic – though they are also enjoying a renaissance of sorts as people head out to shop again.

“We have been saying for a long time that online retail is a positive for the type of centres we own,” said SCA chief financial officer Mark Fleming.

’It’s not always been understood the big role they play in last-mile logistics. No one is closer to the end consumer than we are.”

Highlighting the growing role of online fulfilment at neighbourhood malls, Mr Fleming said Woolworths was adding mini automated “e-store” distribution centres at the back of some of their supermarkets to cater for online orders.

“We’re doing our third e-store with Woolies at the moment,” he said.

Alongside the valuation gains, SCP said it would pay a 7.2¢ per unit distribution for the six months to December, up 26 per cent year-on-year and slightly higher than the “at least” 7.1¢ interim payout forecast in October.

It means that a second-half distribution of 7.8¢ (SCP has forecast a full-year payout of at least 15¢) will surpass the pre-COVID-19 7.5¢ interim distribution paid in the December 2019 half year, cementing the full recovery the retail REIT has made since the pandemic struck.

“A solid valuation update as expected, given strong transactional evidence in the convenience neighbourhood-sub-regional sector,” said analyst Stuart McLean from Macquarie Securities.

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