CEO OUTLOOK 2023: Charter Hall

ntres, managing in excess of $14.5 billion in assets. Our strategy to be the leading manager of convenience-based retail property that predominately services the non-discretionary retail sector remains unchanged. It’s this strategy, our team of retail and real estate experts and our deep tenant customer cross-sector relationships, that will ensure we continue to deliver a resilient and growing income stream for our investors and remain prudent but optimistic about the year ahead. As we emerge from three years of pandemic-related impacts to retail and related changes in consumer behaviours, 2023 is presenting a new set of challenges in the retail sector. As we watch for the economic impact of the sharpest inflation surge in four decades coupled with the fastest and largest rate hiking cycle on record, falling residential real estate prices, negative real wage growth, and low levels of consumer confidence, we expect to see continued pressure on spending growth over the coming months as families make necessary adjustments to their household budget to accommodate cost of living pressures. While this will inevitably influence the way people work, play and spend, for us at Charter Hall and our retail portfolio, we will continue to work with the evolving needs of our retailers, our investors and our shoppers to ensure we remain well-positioned to service our customers and our communities. Resilience of convenience-based retail As households adjust how and where they spend, a divergence between discretionary and non-discretionary retail spending is sure to follow. People will prioritise necessities like groceries, food, health and other essential services over fashion, homewares and ‘nice to have’ items. At Charter Hall, our retail portfolio has been carefully curated to focus on convenience-based retail. Our centres are highly weighted towards non-discretionary everyday needs and are well-located, benefiting from excellent transportation links affording greater access to communities, higher and better use potential over time, and are positioned to benefit from population growth. Our actively curated tenancy mix and asset management approach ensures a level of resilience against the current headwinds. Additionally, the size of our convenience-based centres are smaller than an average sub-regional asset with significantly greater space allocation to supermarkets and half the number of specialty retail tenancies. Because of this make up, both specialty and supermarket productivity continue to outperform Urbis averages when compared to neighbourhood and sub-regional centres and our centres remain the dominant and preferred choice within their catchments. Our ongoing strategy to be the leading provider of convenience retail property that services predominantly the non-discretionary retail sector puts us in a unique position to combat the current economic challenges and maintain a growing and resilient income stream for our investors. Pacific Square, NSW Online shopping and e-commerce There’s no question that consumer behaviours have been evolving with the rise of online shopping and that this trend was accelerated across much of the retail sector during the COVID-19 pandemic. This included an increase in grocery delivery services and Direct-to-boot or Click & Collect, affording consumers the luxury of choice and convenience when shopping for groceries. Many predicted that this would result in fewer shoppers stepping foot in grocery stores and a reduction in the amount that consumers spent per shop. In reality, almost one in three customers that shop by Click & Collect for groceries also visit the centre on the same trip, as the complementary convenience stores and services fulfilled other shopping and personal needs. Additionally, omnichannel customers, or customers that shop both online and in-person, on average spend 2.1 times more than single channel customers. So what does it mean for the future of e-commerce in Convenience Retail and for our centres? First, the penetration of e-commerce in the Food & Groceries sector remains low domestically – and globally – underpinning the resilience and continued community need of the Convenience Retail sector. Further, to support the e-commerce strategy that is well-established for supermarkets like Woolworths and Coles, proximity to customers is placing greater reliance on the store network as a basis for their distribution network solutions. The sophisticated requirements of convenience goods distributions can only be met by significant scale and depth. As such, the physical grocery retailing network forms an essential function in online distribution capabilities. With 95% of our Coles and Woolworths supermarkets offering either Direct to boot or Click & Collect services, we are well placed to meet the ongoing needs of our communities and continue to optimise our partnerships with our major grocery tenant customers. This further enhances the importance of convenience-based retail centres and we don’t see that changing. Lastly, this shift has also resulted in an increased provision of services such as allied health, medical, fitness and education, which are complementary, non-discretionary and less susceptible to online retailing. This evolution continues to attract shoppers to visit our community-based centres more regularly. Well-positioned for through-cycle performance Charter Hall’s retail portfolio is uniquely positioned to benefit from the current inflationary environment. With economic conditions likely to result in a tightening in both corporate and household expenditure for discretionary items, the stability and continued growth in non-discretionary and convenience-based retail is forecast to deliver resilient and superior risk-adjusted returns relative to other traditional commercial property. We also benefit from income stability in our portfolio, thanks in large part to our high exposure to Long Weighted Average Lease Expiry (Long WALE) leases. This is really a two-pronged benefit, as the inherent nature of a Long WALE asset provides stability, and for our portfolio, we have deep partnerships with the highest quality non-discretionary retail tenants in Australia. More than 80% of Charter Hall Retail’s income is derived from market-leading, non-discretionary retailers, including Coles, Woolworths, Wesfarmers, ALDI, Ampol and BP, which reflects the strength of our partnerships and the benefit of our scale. And beyond stability, we are poised to capture inflation-linked rental growth through triple net (NNN) leased convenience-based retail properties, driving superior income growth for our overall portfolio. These Long WALE convenience-based assets provide our investors valuable diversification benefits, enhanced tenant covenant and security of income with a strong major tenant customer growth profile. Our Long WALE convenience retail portfolio is forecasted to deliver 6.2% major tenant income growth in FY23. What’s ahead for Charter Hall Retail It is the strength and scale of the Charter Hall platform, coupled with our proven strategy and deep tenant customer relationships, that has enabled us to become Australia’s largest owner of Long WALE convenience retail assets and the leading owner of convenience-based non-discretionary shopping centres. Our active strategy and approach to partnering with Australia’s largest non-discretionary tenant customers and providing cross-sector property solutions will continue to differentiate us and provide resilience throughout all phases of the property cycle. We will continue to utilise our scale and sophistication across procurement and ESG initiatives to deliver cost certainty to our tenant customers during these uncertain times and work with our major tenant customers Ampol and BP to be at the forefront of the energy transition process through the rollout of Electric Charging stations. It is this approach and our commitment to net zero carbon emissions by 2025 that has seen the Charter Hall Retail REIT listed in the top quartile for the 2022 global GRESB ratings. Our strategy will remain consistent, and we will continue to curate our portfolio to enhance asset quality and maintain income resilience and growth for our investors. Our greatest asset of all will always be our people that make up the broader Charter Hall team, who are a passionate team of retail and real estate experts. It’s this team that has achieved and maintained our industry high satisfaction relationship rating through our annual CentreSAT survey for the past two years. So we enter 2023 optimistic, energised and ready to continue delivering for our tenant customers, our investors, our communities and our people.