My contrarian view on retail surprised a reader. After explaining I am mostly bearish on retailers and bullish on owners of large retail property, the reader accepted that view.
I hope he acted on it. Westfield Corporation, my favoured retail Real Estate Investment Trust (REIT), is up almost 8 per cent from its low this month. My two other preferred ideas, Scentre Group and Vicinity Centres, are each up about 4 per cent.
The market is starting to accept that Amazon’s arrival in Australia, and Myer Holdings’ closure of several stores, is not Armageddon for owners of our best shopping centres. Both are headwinds for retail REITs, but the market over-reacted with the sell-off this year.
I recently visited one of the Southern Hemisphere’s largest shopping centres. What a mistake: the road to the car park was gridlocked as customers tried to get in. I counted only a handful of vacant stores in the centre; each was being purposed for another owner.
Yes, weak retail sales growth, persistent consumer gloom and rising competition are hurting retailers. So far, they are not translating into sharply higher vacancy rates or cheaper rents when leases are re-set at the so-called “fortress malls”.
Second-tier malls will feel the pinch, but the great shopping centres – the ones customers visit for entertainment – are holding up okay.
Retail REITs are a lower-risk way to play an eventual recovery in retail compared to owners of fashion brands, department or discount stores, or electronics outlets. Demographic and social trends are tailwinds for the best shopping centres, which continue to grow, offer more products and services and become the “main street” in many areas.
Longer term, fortress malls here and overseas are hard to replicate and have growth opportunities through multi-use developments: expect more office, residential and even hotel properties to be developed as the best centres attract more people each day.
Opportunities in niche REITs
Smaller retail REITs have had less market attention. I am wary of most, particularly those that own mid-size centres; the ones people desert for the bigger fortress malls. Shopping Centres Australasia Property Group, owner of neighbourhood shopping centres, is an exception, as I have outlined previously for The Bull.
Aventus Retail Property Fund is another. The owner of “superstore” property centres is unusual by Australian standards. Big-box retail property, well established in US equity markets, is a fragmented, mostly privately held market here.
That explains why the market overlooked Aventus’ Initial Public Offering (IPO) in October 2015. Aventus raised $303 million by issuing $2 shares. After a subdued start, the price peaked at $2.50 this year, before easing to $2.30.
My interest in Aventus is based on six key reasons. First, superstore centres should be less affected by growth in online retailing compared to traditional retail centres of comparable size. Big-box centres typically count indoor and outdoor furniture companies, homeware and electronic retailers as tenants. Several of these retailers are more protected from the online threat.
Second, Aventus has low exposure to problem areas in retailing: discount and department stores and apparel retailers, for example. It might suffer if electronics retailers lose share to Amazon but it has a good spread of tenants, many of them offering well-known brands.
Third, the housing market is having an orderly correction, not a crash that property alarmists have predicted for the past 20 years. The property cycle is important for Aventus given its tenants include a range of furniture, homeware and hardware providers.
Home-improvement leaders, such as Bunnings, continue to report solid growth in Australia and look to have weathered the broader retail downturn. That’s good for Aventus tenant demand, vacancy rates and rents.
Fourth, the superstore-centre market is highly fragmented. Aventus is well placed to continue acquiring big-box centres and lift their performance. The REIT owns 22 centres, mostly in New South Wales and Victoria. It’s capable of owning many more in the next five years.
Fifth, I like the superstore-centre concept. The convenience of having many big-box retailers under one roof appeals to customers. The scale of these centres attracts customers and helps Aventus generate higher occupancies and performance than privately owned centres.
Finally, Aventus is reasonably valued. A Net Tangible Asset (NTA) per unit of $2.22 compares to the $2.30 unit price. Aventus, arguably, should trade at a slightly higher premium given its first-mover advantage in a growth segment, performance since listing, management and prospects.
A handful of broking firms that cover the trust (the sample is too small to rely on) have an average price target of $2.44, suggesting Aventus is a touch undervalued. That’s probably right.
My expectation of Aventus consolidating the sector in the next five years, and benefiting from an eventual retail upturn, implies continued steady price gains and growing distributions.
As much as I like the giant fortress malls, even they cannot house dozens of bulky-goods retailers because their rents are too high. As with shopping centres, owning the owners of retail property – rather than the retailers themselves – makes sense in bulky goods.
Chart 1: Aventus Retail Property FundSource: The Bull
• 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 particular needs. Before acting on the information in this article you should consider the appropriateness of the information, with regard to 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 Nov 17, 2017.