Macquarie tells Vicinity Centres to spin off second-tier assets

Vicinity Centres would be better off listing its second-tier assets rather than selling them, Macquaire says.

Vicinity Centres’ Chadstone shopping mall in Melbourne. Picture: Aaron Francis

Retail landlord Vicinity Centres would be better off carving off its second-tier assets into a new listed company rather than selling them piecemeal, equities house Macquarie says.

The move would be the next step for the company that was ­created out of the merger of Novion Property Group and Federation Centres in 2015.

Vicinity has already offloaded some of its mall stakes to superannuation fund-backed ISPT, financial services group Challenger and billionaire Stan Perron. In total, the group had sold about $1.7 billion of assets in the past two years, and another $5.8bn, or 40 per cent by value of the portfolio, fell into the group’s second tier, analysts led by Rob Freeman said.

Some of Vicinity’s older malls are coming under pressure as department store sales slow and the threat of Amazon setting up in Australia is looming large.

“Factoring our negative stance on retail, we believe this prior approach will have to be rectified,” Macquarie wrote in a note to ­clients. “An in-specie (distribution) would be a much quicker/cleaner solution, in our view.”

The bank’s model identifies Vicinity’s top-tier and second-tier assets based on sales productivity, occupancy cost, income growth and mall competitive advantage, and assumes funds management activities to stay with the top tier.

The top-tier portfolio would be “highly desirable” and include malls such as Melbourne’s Chadstone Shopping Centre and Emporium, as well as Sydney’s Chatswood Chase.

The bank said the sales productivity of such a vehicle would be $13,700 per square metre, ahead of rival Scentre Group, at $11,230 a square metre. But Macquarie warned of continuing structural headwinds and low growth for second-tier mall assets and upgraded its view on the stock from underperform to neutral.

Consideration of this strategy comes as the race for the $3.5bn Blackstone portfolio comes to a head. Bids are due shortly for the portfolio, which is being handled by real estate firm JLL and investment banks UBS and JPMorgan.

One alternative for Vicinity would be to tap into any under­bidders in this process, which is said to have attracted a wave of international capital keen to invest in Australian assets.

The second-tier portfolio would be internally managed and its formation could be compared to Woolworths spin-off SCA Property Group. That group has since emerged as leading specialist in neighbourhood shopping centres and there may be demand from funds managers for another stock.

Other property trusts to spin off assets include GPT Group, which created BGP Investment to hold its stakes in European shopping centres and apartments, and US-based Simon Property Group, which spun off Washington Prime Group to hold retail assets. Local group Stockland also mulled a partial spin-out of its retail division, but this was not pursued.

The Macquarie research comes as retail landlords remix their portfolios to combat the rise of online shopping, focusing on adding eateries and reducing the amount of tenants in more challenged categories such as apparel.

The segment is also preparing for the arrival of Amazon, which recently confirmed plans to roll out its full retail offer in Australia.

A survey of suppliers by UBS last week found that Amazon would start selling groceries in Australia within the next three years, after beginning discussions with some local suppliers and registering hundreds of trademarks locally.