Download full article

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

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.

1 “Omni-channel” combines physical and online commerce, but also increasingly involves social media as a new trading channel

 

IMPORTANT NOTICE


This material (the “Material”) is solely for the use of the recipient who has received it directly from AXA Investment Managers – Real Assets or any of its affiliates (“AXA IM – Real Assets”) for information and discussion purposes only. It is to be treated strictly confidential. This Material and any information contained herein should not be copied or circulated, in whole or in part, without the prior written consent of AXA IM – Real Assets. This Material does not constitute an offer or solicitation, nor is it the basis for any contract for the purchase or sale of any investment, security or product. It is not for use by retail customers under any circumstances. AXA IM – Real Assets disclaims any and all liability relating to a decision based on or for reliance on this Material.
This Material has not been reviewed, approved or disapproved by any regulatory authority in any jurisdiction. The distribution of this Material in certain jurisdictions may be restricted by law. The recipient represents that it is able to receive this Material without contravention of any applicable legal or regulatory restrictions in the jurisdiction in which it resides or conducts business. AXA IM – Real Assets does not accept any responsibility for ensuring that a recipient complies with applicable laws and regulations. The Material does not constitute, and may not be used for or in connection with, an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or to any person to whom it is unlawful to make such offer or solicitation.
Due to its simplification, this Material is partial and thus the information can be subjective. The information set forth herein does not purport to be complete and is subject to change without notice. This Material does not take into account the recipient’s objectives, financial situation or needs. This Material shall not be deemed to constitute investment advice and/or tax, accounting, regulatory, legal or other advice and it should not be relied upon as the basis for a decision to enter into a transaction or as the basis for an investment decision. The recipient is urged to consult with its own advisers with respect to legal, tax, regulatory, financial, accounting and other matters concerning any investment decision.
Analysis and conclusions express the views of AXA IM – Real Assets and may be subject to change without notice. All information, analysis and conclusions herein present AXA IM – Real Assets’ current knowledge and market estimation at the time of its production. Nevertheless it can come to unintended erroneous statements or presentations and the information may change at any time without previous announcements and/or notices to the recipient of this Material. Thus, a liability or guarantee for the up-to-datedness, correctness and completeness of the allocated information, estimation and opinion cannot be assumed. Information contained herein may vary from previous or future published versions of this Material. Information regarding the background and experience of personnel of AXA IM – Real Assets are provided for information purposes only. Such persons may not necessarily continue to be employed by AXA IM – Real Assets and may not perform or continue to perform services for AXA IM – Real Assets. The reference to league tables and awards are not an indicator of the futures places in league tables or awards. Unless otherwise noted, information provided herein is current as of the date of this Material.
The data including but not limited to scenarios and investment guidelines set forth in this Material are presented for illustrative purposes only and such data could vary significantly from the final investment policy and/or actual results. Where past performance, past experience and track record information is provided, this is not necessarily representative of future results: performance is not constant over time and the value of investments may fall as well as rise. No representation is made that any results or other figures indicated in this Material will be achieved and that investments will achieve comparable results that targeted returns. Property investments can be illiquid and there is no guarantee that properties can be sold at valuation levels. Investment may be subject to gearing and should be considered higher risk than a similar ungeared investment. Investment returns may be subject to foreign currency exchange risks. Actual results on unrealized investments described herein will depend on, among other factors, future operating results, the value of the assets and market conditions at the time of disposition, legal and contractual restrictions on transfer that may limit the liquidity, any related transactions costs and the timing and manner of sale, all of which may differ materially from the assumptions and circumstances on which the valuations used in the prior performance data contained herein are based.
Some statements and analysis in this Material and some examples provided are based upon or derived from the hypothetical performance of models developed by AXA IM – Real Assets and/or third parties. In particular, in connection with certain investments for which no external pricing information is available, AXA IM – Real Assets will rely on internal pricing models, using certain modeling and data assumptions. Such valuations may vary from valuations performed by other parties for similar types of investments. Models are inherently imperfect and there is no assurance that any returns or other figures indicated in this Material and derived from such models will be achieved. AXA IM – Real Assets expressly disclaims any responsibility for (i) the accuracy of the models or estimates used in deriving the analyses, (ii) any errors or omissions in computing or disseminating the analyses or (iii) any uses to which the analyses are put.
Any hypothetical illustrations, forecasts and estimates contained in this Material are forward looking statements and are based upon assumptions. Hypothetical illustrations are necessarily speculative in nature and it can be expected that some or all of the assumptions underlying the hypothetical illustrations will not materialise or will vary significantly from actual results. Accordingly, the hypothetical illustrations are only an estimate and AXA IM – Real Assets assumes no duty to update any forward looking statement. This Material may also contain historical market data; however, historical market trends are not reliable indicators of future market behaviour.
Although some information has been provided by AXA IM – Real Assets, the information is based on information furnished by third parties the accuracy and completeness of which has not been verified by AXA IM – Real Assets. All information and data in this Material is established on the accounting information, on market data basis or has been sourced from a number of recognized industry providers. All accounting information, except otherwise specified, is un-audited. While such sources are believed to be reliable and accurate, none of AXA IM – Real Assets or its respective affiliates, directors, officers, employees, partners, members or shareholders assumes any responsibility for the accuracy or completeness of such information. Details of these sources are available upon request. Any pictures, plans, drawings, diagrams or schedules set forth in this Material are provided for information purposes only.
AXA IM – Real Assets makes no representation or warranty (express or implied) of any nature nor is responsible or liable in any way with respect to the truthfulness, completeness or accuracy of any information, projection, representation or warranty (express or implied) in, or omission from, this information.