For those of us who have spent enough time within the retail industry, it’s a common source of bewilderment when public commentators and economic analysts suggest that the industry’s Armageddon is nigh and retail as we know it will cataclysmically change forever.
When I think back to this time last year, many were suggesting that the arrival of Amazon to Australia was the death-knell. Rewind a few more years and it was the arrival of physical retail giants, like Costco and ALDI, that were going to fundamentally change the way Australians shopped and interacted with shopping centres.
While the arrival of each of the players I mentioned shouldn’t be understated, they certainly didn’t spell the end of the shopping centre. If anything, they have provided evidence of their resiliency – through adaptation and renewal.
Adaptation and renewal are the catalysts for change that will transform shopping centres into retail-led, mixed-use destinations and it’s this adaptation that is the hallmark of their survival.
Notwithstanding the pervasiveness of disruption affecting all our lives and the cyclical headwinds our industry is facing via a ‘mixed bag’ of economic variables, the instinctual human desire to socialise and dwell in environments where people feel safe and connected to is universal and enduring, and points to our future.
As we move into a new year there are immediate challenges presented by a patchwork economy but dominant retail real estate remains a core asset class that provides inflation and downside protection for investors, particularly at lower points in an economic cycle.
Economic conditions
It’s reasonable to say the Australian economy has produced a ‘mixed bag’ of results more recently:
• The Australian economy outstripped all economists’ expectations over the past financial year. Real GDP increased by 3.4% over the year to the June quarter 2018, up substantially from the 1.9% growth seen a year earlier, and the best result in six years.
• Employment growth has been solid, rising 2.9% over 2017/18. While growth eased slightly in early 2018/19, it remains well above the growth in the working age population. Improving job prospects and other structural changes have attracted more people into the labour force, with the labour force participation rate rising to close to record highs. The unemployment rate has also trended lower.
• Australia’s housing market is currently undergoing a correction following the house price boom seen between 2012 and 2017. Since peaking in September 2017, nationwide house prices have fallen about 2.7%. The boom and subsequent correction have largely been driven by developments in Sydney and Melbourne. Prices in Sydney have fallen 6.2% since their peak in 2017, while prices in Melbourne have dropped 4.4%. Nonetheless, prices remain more than 40% above the levels seen five years ago.
• Despite headwinds stemming from a correction in the housing market, consumer spending has remained reasonably resilient, with real consumption up 2.9% over the past year.
It’s our shared view within QIC that despite these patchwork results producing a tough year for the retail sector, the outlook for the Australian economy remains solid.
The combination of diminishing mining headwinds, a public infrastructure boom, a further recovery in business investment and robust export growth bodes well for ongoing solid growth in the Australian economy. However, softer consumer spending, a cooling housing market and the impact of the drought is likely to see growth ease, in coming quarters, from the strong pace seen. We expect real GDP growth will remain close to a trend pace of 2.8% over 2019 and 2020 and well above the sluggish 2.4% experienced on average over 2013 to 2017.
Solid employment growth will place further modest downward pressure on the unemployment rate. We expect the unemployment rate will average close to 5% in 2019, a rate in-line with official estimates of full employment, before edging down to about 4.8% in the 2020s.
This reduction in spare capacity in the labour market is expected to place gradual upward pressure on wage growth. Recent developments reinforce our view that wage growth has troughed, with annual growth in the wage price index edging up from 1.9% to 2.1% over the past 18 months.
Perhaps the biggest weight on our economy is the housing market. Our baseline view remains for a soft-landing in the Australian housing market. We expect nationwide prices to fall between 5% and 10% from their peak in September 2017, which would be similar in magnitude to the two most recent corrections in the Australian market. The correction is expected to be felt predominately in Sydney and Melbourne, where prices are expected to fall about 10% to 15%, while prices in most other major capital cities are expected to remain relatively flat. There are four factors that contribute to this view: improved labour market conditions, ongoing low interest rates, few distressed sellers and strong population growth.
With all this in mind, the retail outlook is expected to remain constrained in 2019. The housing market correction is expected to weigh on sales, with nationwide growth in retail volumes expected to average about 2.5% in 2019, close to the pace of sales experienced over the past year.
So, while things are tougher for the retail sector, there is no imminent Armageddon moment, and the onus on shopping centre owners and retail partners is to continue to innovate to engage the communities for whom we serve.
Experiential retailing is key
There is a lot of talk at the moment in our industry about ‘placemaking’. Like QIC, many of our counterparts are focused on this concept as the way in which we make our assets sticky with their communities – continually drawing people to them to engage in retail, food and lifestyle priorities.
But beyond the high-level concept, what is placemaking? How does it add value to a shopping centre? For us, the concept is multi-pronged. First, it must be people-led, and therefore must integrate values of sustainability, innovation and humanity. Second, we must adapt to deliver a mix of uses at our centres. Driven by the more fluid and digitally enabled younger generations, ever-increasing collaboration across different industries means that we can’t stay in our lanes anymore. Instead, we must listen, be agile and move – at pace – with the consumer. Interestingly, the more digitally and globally connected we are, the more we want to seek out individuality and an expression of our local community. Therefore, the third prong for us is that the mixed-use destinations we create are successful when they express the essence of their communities – their aspirations, their whole life needs.
The critical ingredient here is the expertise and foresight of people who deliver on this goal. The best laid strategies can fail without the right people delivering them. The art is in the execution.
We’ll continue to innovate in areas of food and beverage and hospitality with a focus on sourcing concepts, product and entertainment from within the communities we operate – just like we have done at The Kitchens at Robina Town Centre, which has now been further integrated into the centre via our Central Malls development.
We will continue to work with local and state governments to unlock the potential created by greater amenity and connection with major public transport nodes. Just as we are doing with the first stage of our planned development at Castle Towers that is scheduled to commence this year, which seamlessly and wholly connects Castle Towers with Castle Hills’ new train station. This station will serve as a major transport interchange when Sydney Metro Northwest opens in 2019.
ESG remains paramount
While there is much pubic commentary espousing the impact digital disruption is having on the retail sector, I am of the view that more attention should be paid to the transformative influence the escalation of ESG-related priorities continues to have within our industry.
Embedding Environmental, Social and Governance (ESG) priorities into all our decision making has produced significant benefits for us as a business. It has improved levels of diversity within our ranks internally – something I am extremely proud of as one of the founding members of the Property Male Champions of Change.
Just like our peers, who are also making significant progress in environmental management, we have improved the efficiency and environmental footprint of our assets. In the past year, we have achieved strong results again for our most recent NABERS and GRESB ratings of sustainability performance for the QIC Shopping Centre Fund as well as QIC Property Fund. We have also commenced submitting the retail assets in our QIC Active Retail Property Fund and QIC Australian Core Plus Fund portfolios for Green Star Performance Portfolio Ratings. Well suited to assets <20,000m2 GLA, the internationally-recognised Green Star Performance Benchmark provides a holistic sustainability performance measure for some of our smaller assets. It is pleasing to see the collective action of our industry on this front.
In alignment with our goal to create destinations that become the hubs for their communities, we have continued to deliver a range of community investment programs through our centres. As an example, one of our flagship social investment programs – our partnership between Grand Central Shopping Centre in Toowoomba and TAFE Queensland South West – is delivering and will continue to deliver opportunities for people to gain qualifications in retail and hospitality. We have celebrated more than 150 people graduate since the partnership commenced two years ago, with many taking advantage of the 1,000 retail or hospitality jobs created at Grand Central through the $525 million redevelopment project completed in 2017.
ESG enhancement will continue to be our top priority.
About QIC Global Real Estate
QIC is one of Australia’s largest institutional fund managers, which has over the past 25-plus years acquired and developed a retail portfolio of 49 real estate assets globally.
QIC’s domestic real estate portfolio comprises assets in Queensland, Victoria, New South Wales, ACT, South Australia and Western Australia. Its international property holdings include regional retail malls in the United States located on the West Coast in California and Nevada and on the East Coast in Florida, New York, Virginia, West Virginia and Pennsylvania.
QIC’s global real estate portfolio was valued at AUD $22 billion as at 31 December 2018.
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