CEO OUTLOOK 2021: Brett Williams, AMP Capital

d COVID-19, I have strong confidence that our sector is ready to make the next evolutionary leap in its offering in 2021 and beyond. It will require clear, distinct shifts in the way we mix our centres, engage our customers and collaborate with our retail partners. The pandemic fundamentally challenged the retail status quo, but as a believer in the purpose and benefit of retail centres to both our retailers and the community, I believe they still have the potential to flourish in the new normal. What have we learned from the pandemic? If there’s one thing we’ve learned in the past six months, it’s how to adapt.  Earlier in the year, some thought that the pandemic would spell the end of physical retail. But what has been proven time and time again is that staying connected to and wholly focused on delivering great product and experiences that meet the needs of our customers, retailers and communities, is what keeps people coming back to our shopping centres.  After seeing shops reopen in the second half of 2020 and some resemblance of normality restored, shopping centres will continue to be judged on their ability to deliver the right experiences where and when customers want them. In the lead up to 2020, we had commissioned significant market and consumer research to narrow in on the key trends that will define the next decade and ultimately underpin our approach to managing this asset class. This has verified the roadmap we need to follow going forward.  COVID has not changed these areas of focus, rather it has rapidly accelerated our timeline to act on them. The good news is we are standing on firmer ground with each week that passes, so we will be able to undergo this next evolution with a much stronger outlook compared to even a few months ago.  Consumer confidence is sitting 14.6% higher than a year ago and 41.5% above April’s low, after recording its most optimistic level in ten years in December (Westpac). Retail trade is sitting well above pre-pandemic levels even when online sales are stripped out (ABS), and our retailer partners are reporting strong financial results on both a sales and profitability basis.  North Mall, Karrinyup Shopping Centre, Perth The household savings rate is also stronger, meaning there is more spending firepower to come even as fiscal stimulus tapers off. From an investment perspective, cap rates have remained relatively stable, given the attractiveness of retail’s defensive income streams in a world hunting for yield and the scarcity of quality available stock in Australia. In 2020, we saw downward adjustments to regional shopping centre valuations through the adoption of lower market rents and growth forecasts. Consequently, from an investment perspective, these assets are better positioned for future growth and are now looking more appealing to other sectors from a relative value perspective. Plenty of reasons for optimism! A new form of engagement with customers and tenants The biggest structural changes in retail as we know stem from both market forces that are not unique to retail – changes in demographics, consumer behaviour, the pace and quantum of technological change and the impacts of environmental change – as well as the more retail specific consumer shift to online. COVID has accelerated some of these shifts requiring landlords and retailers to adapt their strategies accordingly. As an example: • The shift from products to experiences isn’t a new concept. As younger generations’ share of spend rises, shopping centres have transitioned from passive places ‘to buy stuff’ to engaging places ‘to do stuff’.  COVID-19 has reinforced the need to have a variety of experiences on offer from general convenience to immersive, from large group gatherings to more intimate events, delivered in-store with our retailer partners, in common mall areas, and in interactions beyond the four walls of the shopping centre.  • The shift from multi-channel, to omni-channel which places the focus squarely on the customer with the goal of creating a seamless customer experience across every channel. For landlords, this means enabling better integration of the offline/online proposition such as Click & Collect, outbound order fulfilment, parcel returns management and dedicated food delivery pick-up zones (eg. UberEats).  Helping our tenants derive more value from the combination of their physical and online footprints will be beneficial for everyone. During the height of COVID, restrictions in New Zealand when a number of fast food retailers were unable to trade, many of our centres collectively profiled retailers who had a Click & Collect service available in centre through a central landing website page where they were able to easily reach customers via social media. Charopy bin trial • Shifting beyond personal health and sustainability to holistic wellness. The concept of health is extending beyond the physical to incorporate mental and community health. The line between personal wellness and environmental wellness is also blurring, particularly among younger generations. Shopping centres have the opportunity to accommodate broader health and wellness uses, create environments that promote overall wellbeing, and implement sustainability initiatives that deliver financial and societal benefits. Shoppers at Macquarie Centre responded well to our Charopy bin trial – distributing more than 9,500 bottles in less than three months – highlighting environmental issues are front of mind. What will success look like in the future? These structural shifts provide guideposts for how physical retail needs to evolve in order to meet and exceed consumer needs in a post COVID environment. Successfully adapting in line with changing consumer needs requires excellent execution, and below are some of the building blocks we consider critical.  Clearly positioned assets Retail is a heterogenous asset class. As the sector has faced challenges such as the move to ecommerce, outperformance has increasingly accrued to higher quality assets. ‘Quality’ is not a binary designation – it reflects a raft of factors including location, catchment, offer and site characteristics. Most importantly, it represents being the best of what you offer. For a smaller asset focused on ‘essentials’, this might not mean a luxury brand mix, but rather embedding convenience into every aspect of the shopping experience. For a Super Regional, like Perth’s Karrinyup Shopping Centre, this could mean having the most brands under one roof; offering a range of immersive experiences that add a sense of wonder and excitement to a family outing; and premium services that make shoppers feel special. Assets that have a clarity of purpose and market-leading execution of that offer will continue to attract consumers and tenants. The major $800 million development of Karrinyup is addressing the market opportunity to be the ultimate destination for retail in Perth and has secured a number of firsts for the market. On completion it will include three supermarkets, two department stores, five international mini majors, seven national flagship stores, a strong health and wellbeing hub and two unique dining precincts. Auto Mall in Indooroopilly Shopping Centre Extending beyond traditional retail uses The consumption demand market for shopping centres continues to expand beyond the traditional definition of retail. As the consumer wallet becomes more aligned to services, experiences, and non-discretionary expenses, so too does the shopping centre category mix. While retail will remain the dominant usage, the introduction of additional complementary uses will support the performance of retail space, while also providing diversification benefits that make cashflow for investors more defensive through cycles and different market conditions. Assets with high local amenity, accessibility and appropriate structure and site characteristics, are better placed to deliver true mixed-use destinations. Recently we announced a partnership with national automotive dealership operator Eagers Automotive to establish an Auto Mall in Indooroopilly Shopping Centre – marking a complete shift to both the way cars are marketed, purchased and serviced in Australia and the retail mix of regional shopping centres. We know that customers are seeking a broader offer and the AutoMall Indooroopilly is just one of the new usages we are creating that customers will come to expect in the future.  Beyond the product mix, larger centres being viewed through the prism of value creation and mixed use redevelopment have the potential to unlock true underlying ‘urban infrastructure’ value.  Combining services, workplace amenity, living and leisure in a manner that complements the core retail usage and leverages the existing land holdings will continue to gain traction. The residential apartments at Karrinyup are just one example and extend across a number of our redevelopment plans. Karrinyup Shopping Centre, Perth Collaborative mindset In an increasingly competitive environment, doing things the same way and with the same mindset doesn’t cut the mustard. Many of retail’s future successes will depend on a more collaborative relationship between landlords and tenants – a deeper understanding of each other’s strategic priorities; a willingness to share data and jointly execute as opportunities arise. For landlords, the shift in mindset must also consider value beyond rent for space. We offer more than a shopfront and traffic – we are infrastructure providers, business enablers, service deliverers.  Part of the beauty of retail is that it has the ability to shift and change to create value. Consumer trends and market forces are creating a natural selection process – retail isn’t going away, but it does need to become faster and fitter to succeed. Assets that are best positioned in terms of their location, proposition, adaptability and execution will thrive. In this turbo-charged environment, the faster landlords and retailers adapt, the faster they can create value for their communities, shoppers, tenants and investors.    As we emerge from the challenges of 2020, I am hopeful that we can use these reminders and new learnings to continue to adapt our retail offering to meet the needs of our customers, in this year and for many years to come.