Odinian Beta

Even before COVID-19 suddenly hit the western world in early calendar 2020, shopping centre landlords such as Scentre (ASX: SCG) and Vicinity Centres (ASX: VCX) were being pressured by the rise of online selling.

With people no longer having to travel to bricks-and-mortar stores to buy goods and services, instead being able to do so online from home, shopping centres are losing their monopoly on foot traffic and potentially their power to charge high rents to tenants.

From the point of view of retailers, the beauty of online selling is that they can set up shop online, advertise and sell their wares, all without having to go to the time and expense of setting up a physical store.

Previously, if retailers wanted to maximise the number of passers-by and people entering their physical stores, then they had to pay up for the best locations, namely in Westfields owned by Scentre Group or in other large shopping centres such as Vicinity Centre’s Chadstone in Melbourne or Chatswood Chase in Sydney.

In response to the structural trend towards online retail, the likes of Westfield and Vicinity were already trying to tilt their focus to tenants such as food, drink, entertainment, gyms, medical centres and others who are less likely to have their businesses destroyed or at least significantly affected by the rise of online shopping.

Trend supercharged

As a result of the sudden impact of the pandemic, the structural trend towards retail moving online only accelerated.

Further, due to lockdowns drastically reducing footfall in shopping centres, many tenants struggled to pay rent. Some even refused to do so until things improved. This resulted in the shopping centre owners such as Westfield and Vicinity Centres writing down the value of their assets.

This supported the argument that the value of shopping centres had been permanently impaired by the rise of online shopping.

However, thankfully the pandemic was always just a temporary phenomenon, and now that vaccines are rolling out across Australia, the country is reopening and people are returning to shopping centres.

Importantly for shareholders in Scentre, Vicinity and other owners of large shopping centres, recent market transactions in Australia suggest the bigger “super regional” or “regional” malls are maintaining their value even in the face of the headwinds caused by online selling.

Giant property owner AMP Capital recently sold its majority stakes in Macquarie Shopping Centre and Pacific Fair at capitalisation rates of 4.7% and 4.5% respectively. (The “capitalisation rate” is the rate at which a shopping centre’s net operating income is capitalised to come to a valuation for the centre. The lower the capitalisation rate, the higher the valuation of the centre and vice versa).

Interestingly, the capitalisation rates achieved by AMP are similar to peak pricing for shopping centres before the pandemic-induced falls in valuations, and suggest that investors are still keen to get their hands on large shopping centres.

Perhaps the large shopping malls haven’t been killed off by online retailing yet.