Future Fund checks out of Perth mall as Vicinity makes premium play

The deal shows the strength of demand for assets at the top end of the retail market but also locks in a big pricing reset.

The Future Fund is selling its stake in Lakeside Joondalup Shopping Centre.

The Future Fund’s exit from one of Perth’s largest shopping centres has been sealed, with Vicinity Centres striking a deal to acquire a half interest in the asset from the sovereign fund for $420m.

The transaction, which was flagged by The Australian, settled on Monday evening, with Vicinity saying it would also buy the management of the sprawling Lakeside Joondalup Shopping Centre from rival Lendlease.

The move shows that Vicinity is stepping up its push into higher quality malls where it sees the best opportunities to entice higher-spending shoppers, and it is exiting lower-grade assets which are dominated by syndicators and privatef investors.

The deal was brokered by CBRE’s Simon Rooney and set a fresh benchmark for regional mall assets that carry management rights, and comes after a series of trades in passive stakes in Westfield centres.

Vicinity chief executive Peter Huddle said Lakeside Joondalup was a fortress-style retail asset located in one of Perth’s main activity centres and had been on the company’s “target list” for some time.

“The acquisition of Joondalup, together with the forthcoming redevelopment of Galleria and sale of four non-strategic assets in Western Australia, reflects our deliberate strategy to recycle and redeploy capital in order to right-size our investment and strengthen our asset portfolio in Western Australia,” he said.

Vicinity Centres CEO Peter Huddle at the QVB in Sydney. Picture: John Feder/The Australian

While the transaction marks the Future Fund’s exit from direct retail property locally, it also shows the return of large scale institutions back to buying shopping centres after they have spent years selling off assets in order to get their gearing down or to meet redemptions from exiting fund investors.

The centre’s management will also pass from Lendlease to Vicinity as part of the deal, but Lendlease’s unlisted Australian Prime Property Fund – Retail, will keep its own half stake in the sprawling centre.

Vicinity sees upside in developing the property in coming years. “Vicinity has also secured the property and retail development management rights for Joondalup, which provides the opportunity to utilise our retail management platform to drive asset performance, whilst earning additional fee income,” Mr Huddle said.

He said that with Lakeside Joondalup’s annual retail sales running at almost $800m, and with Vicinity’s ties with retailers, “we are confident there is growth and value to be unlocked. In this context, we look forward to curating an even stronger, flagship asset for Vicinity’s securityholders and on behalf of the asset’s co-owner.”

Vicinity has been selling off older centres in order to buy or develop newer shopping malls. “Premium assets are more resilient through cycles and, with the right retail mix and asset management, have the potential to deliver superior income growth,” Mr Huddle said.

Lakeside Joondalup is a near-100,000 sqm mall and anchor tenants include Myer, Kmart, Big W, Target, Coles, Woolworths and Aldi, as well as Hoyts cinemas. There are close to 16 mini majors and 267 speciality stores and kiosks. The centre has been performing well, partly on the back of the resource-heavy WA economy and growth in Perth’s northern suburbs.

The acquisition is accretive to Vicinity’s earnings, and it has sold off about $550m worth of smaller centres and plans to sell another $250m this year.

The transaction, struck at a capitalisation rate of about 6.5 per cent, will have implications across the industry as many similar centres owned by large landlords are held at tighter rates, lifting their book values above the levels where assets are now trading.

Landlords have been reluctant to mark down their large centres on the basis that individual sales have been struck by distressed vendors who need to rapidly sell to meet redemptions or to cut debt. But the Future Fund weighed up exiting the centre for about six years after first putting its stake on the block with hopes of $650m in 2018.

However, the re-emergence of Vicinity and rival Scentre Group as buyers in the market signals they believe the market is past its worst. The tide turned when Scentre teamed up with investment bank Barrenjoey to take a half-stake in Adelaide’s Westfield Tea Tree Plaza and again Westfield West Lakes.

CBRE said the sale was contested by a range of domestic groups given the centre’s outperformance, strategic growth corridor location, secure tenancy profile and mixed-use development potential.

“The acquisition marks the re-entry of REITs into Australia’s regional shopping centre investment market,” Mr Rooney said. “It signals renewed interest from both REITs and unlisted wholesale funds in this market sector, which is expected to gather momentum throughout the second half of this year.”

The deal also follows Fawkner Property’s acquisitions of Midland Gate in WA for $465m and Cairns Central in Queensland for $390m.

“The value proposition for regional shopping centres has become increasingly compelling for investors, given superior comparative returns on offer, rebased sustainable income profiles and robust performance fundamentals, as compared to most alternative commercial property asset classes,” Mr Rooney said.