Amid never-ending consumer gloom, it is easy to overlook the benefits of population growth for retailers. Australia’s estimated residential population soared by almost 390,000 in the year to March 2017 – the fastest increase since 2014.
A “Big Australia” population policy is a much-needed tailwind for beleaguered retailers, as consumers struggle with high household debt and as competition from online and foreign retailers intensifies. Persistent price deflation is another challenge for discretionary retailers.
Consider the benefits for retailers from annual population growth that is roughly equivalent to the size of Canberra. It’s little wonder that retailers such as Harvey Norman Holdings espouse the benefits of population growth and its effect on demand for appliances and furnishings.
Don’t get me wrong: I detest unsustainable population growth. Sydney and Melbourne residents can see the damage of excessive population growth that is not supported by commensurate investment in infrastructure and new suburbs.
Population growth helps the overall economy, but makes our capital cities less liveable as they become too congested. I have written on the theme of urbanisation and the effects of city densification many times in this column – a trend that will take years to play out.
Convictions aside, population growth is a benefit for retail property owners. One need only consider giant shopping centres, such as Chadstone, to understand the effect of permanent population growth and temporary growth from millions of international visitors each year.
Chadstone is already bursting at the seams at busy trading times, despite a $660-million makeover that included 100 new stores and reportedly made the centre the size of 10 football fields. Finding a spare car park feels even harder as many more people visit the centre.
Less considered is the effect of population growth on newer regional shopping centres. Often, these centres have an anchor tenant in Woolworths or Coles and a dozen or so speciality shops: a liquor outlet, chemist, bakery, coffee shop and so on. It’s all about convenience for the local community on their weekly shop rather than providing a retail experience.
One such centre opened near my parents’ place in north Queensland. The centre was quiet at the start, but seemed to be busier each year when I returned for holidays. The centre was doing a roaring trade on my last visit; for once, finding a car park was hard.
Neighbourhood shopping centres have steady long-term growth prospects. Another 390,000 Australians each year, two thirds of whom are migrants, will drive demand for new centres in outer suburbs and boost patronage of existing ones. Even if population growth eases, it’s still a lot of extra customers who need to be fed.
Larger regional shopping centres, at least those in the best locations, are hard assets to replicate. Unlike industrial and commercial properties that are more cylical and highly competitive, regional shopping centres often have the nearby market to themselves.
SCA reasonably valued
Woolworths spin-off SCA Property Group looks the pick of the regional shopping-centre property owners. I have written favourably about SCA a few times since its $472-million float in 2012. A three-year, annualised total return of 13.6 per cent (including distribution) confirms my view on SCA as a steady, reliable performer.
Chart 1: SCA Property GroupSource: The Bull
SCA owned 75 shopping centres, mostly neighbourhood properties, at June 2017. The properties had an average occupancy rate of 98.4 per cent and were valued at $2.3 billion.
Woolworths provides a third of SCA’s gross rent and Coles provides 10 per cent. SCA’s exposure to non-discretionary retail, less than it was in previous years, provides a level of earnings defensiveness and visibility. Key retail problem areas – apparel and discount variety – constitute less than 10 per cent of the trust’s earnings.
SCA’s funds from operations rose 8.3 per cent to $108.4 million in FY17, and the distribution rose 6.9 per cent to 14.7 cents per unit – slightly above market expectation. At $2.30, SCA is expected to yield almost 6 per cent this financial year.
In its FY17 result, SCA said supermarket sales, particularly from Woolworths, showed improving trends. Speciality tenants continued to perform strongly. Overall, there were signs of a slight pick-up in retail trends in SCA’s result, although nobody is holding their breath.
SCA is well placed to grow organically and by acquisition. The trust acquired $274.9 million of assets in FY17 and divested $311 million. With gearing at the lower end of SCA’s 30-40 per cent range, it has the balance-sheet firepower to drive consolidation in neighbourhood centres.
More SCA anchor tenants are starting to pay turnover rent and five major tenants had base rent reviews in FY17. SCA should benefit from higher turnover rent in the next few years, assuming Woolworths’ sales trajectory continues to improve and the broader retail sector stabilises.
SCA is no screaming buy. A price target of $2.25, based on the consensus of seven broking firms, suggests it is fully valued. Most brokers have hold recommendations. Weaker retailing conditions that lead to lower rental growth in centres is the main threat.
Much depends on one’s investment timeframe. Those seeking stocks that can deliver strong short-term returns should look elsewhere. SCA should provide a double-digit total return (including the distribution) in the next few years without excessive risk. A pick-up in retail conditions in the next year or two, and improved performance from key anchor tenant Woolworths, would be a bonus and the likeliest catalyst to re-rate the SCA unit price.
On balance, SCA looks like a lower-risk way to play the population theme and benefit from an eventual recovery in retail spending.
Long-term investors, such as Self-Managed Superannuation Funds, could do worse than consider SCA and other trusts that are strongly leveraged to population growth. It’s hard to see politicians giving up the easy kick for expanding populations and its effect on economic growth, despite inevitable problems for the community if infrastructure developments lag.
• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at October 17, 2017