Retail is not dead and regionally dominant shopping centres offer an attractive value play

30 January 2019 (10 min read)

Executive summary:

The consumer has taken control of the retail relationship which is putting pressure on retailers’ margins, as they face increased competition and a need to invest in a full reconfiguration of their supply chain to offer an “Omni-channel” distribution model
This pressure on retailers’ margins is likely to limit rental value growth prospects over the short-term, as traditional bricks and mortar retailers’ space consolidations leave more voids than online pure play retailers establishing a physical presence absorb
In our view, regionally dominant shopping centres and second-tier tourist-oriented city high streets represent an attractive “value play” for investors, as we feel the entire sector is being tainted by the same doomsday brush despite the fact that the operational performance of these schemes remains strong
The sector is not without risks, as highlighted by the continued raft of retailer failures and bankruptcies which could be exacerbated if an economic downturn materialised over the short term. In addition, for those schemes that remain viable and in demand, the retailer-landlord relationship has to respond to a shorter retail life cycle and increased ambiguity across ultimate sales channels
Ultimately, we do not think the developed world will stop consuming but rather that the retail landscape is evolving and store footprints are changing to be focused on the highest footfall locations where retailers can engage with consumers to showcase their brand
In addition, the rising global middle class and subsequent increase in tourism should continue to support growth in the Factory Outlet Centre (FOC) model, which offers investors a defensive late-cycle play, as it combines the experience, discount and luxury offer being demanded by consumers

The retail market is under pressure as it responds and adapts to the disruptive force of the internet on its traditional business model. However, retail is far from dead as consumers will continue to shop – only in a different manner – and brands which are able to adapt to the new “Omni-channel”¹ retail model will end up in a stronger financial position, making them viable credit tenants for retail landlords. Furthermore, this increasingly complex and new retail environment emphasises physical retail formats that cater to either convenience or the retail experience. The latter having become increasingly important to shoppers. During this transition phase, retailers would be extremely vulnerable to an economic recession but we feel the sector has fallen so far out of favour – with limited differentiation by scheme quality – so as to provide an attractive entry point for long-term investors able to cherry pick the top, dominant locations with high footfall which successful retailers will continue to target for occupancy.

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Disclaimer

All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and investors may not get back the amount originally invested. Past performance is not necessarily indicative of future performance.

Some of the Services and/or products may not be available for offer to retail investors.

This publication has not been reviewed by the Monetary Authority of Singapore.