The three reasons to invest in regional shopping centres

GUEST OBSERVATION

While the overall retail sector continues to face headwinds, there are three reasons why regional shopping centres may be investors’ pick.

1. One-stop shop: the DNA of regional shopping centres is shifting
   
   Many regional centres are boosting their appeal to consumers, stores and investors by changing the way they do business. What could once be described as clusters of specialty and discount retail stores are now emerging as thriving town centres, where key healthcare services including doctors, dentists and optometrists are finally seeing the value in setting up shop.
   
   It’s not just local service businesses making a lunge for metropolitan centres either, with international chains such as Zara and Aldi rolling out stores across the major regionals. These big brands may tackle Woolworths and Coles for the anchor position in metro centres, increasing their overall traffic.
   
   
2. Mall traffic will boom when residential developments close in
   
   The golden investment opportunity lies in regional shopping centres with great residential potential. As the make-up of regional malls continues to shift towards being a one-stop goods and services shop, over time we can expect to see retirement villages, student accommodation and residential developments built on the boundaries (or on top) of these hubs.
   
   CBD centres won’t necessarily have these same residential opportunities but there are key exceptions. A good example of this is David Jones on Elizabeth Street in Sydney, where there are plans for a residential tower to be built above the store.
   
   
3. Regional investment no longer a developer’s nightmare
   
   Over the past seven years, supply of new regional mall space has lagged below the long-term average of 2.5% of existing stock. It’s not surprising – the GFC caused developers to fear faltering tenant demand for space, the sustainability of yields overall and therefore the value proposition of adding space.
   
   The demographics, however, are in their favour. Australia has the highest population growth in the developed world and with the changing make-up of regional malls we’re starting to see the pipeline strengthen for refurbishments and new developments.
   
   Where is this investment activity taking place? South East Queensland is fast emerging as a retail investment hot spot. In 2015-2016, the Queensland retail investment splash will hit Mt Gravatt, North Lakes, Chermside and Pacific Fair.
   
   While the overall level of retail activity may not be rosy in the short- to medium-term, these improvements are likely to buttress gains in the longer term.
   
   Other major redevelopments in the pipeline include Miranda in New South Wales and Booragoon in Western Australia.

Julia Forrest is REIT portfolio manager at BT Investment Management.