SPH REIT’s bargain Westfield Marion deal exposes mall cracks

It’s the bargain buy that has shaken an industry: little-known SPH REIT’s $670m deal for a half stake in Westfield Marion.

Westfield Marion is Australia’s 11th-largest shopping centre

Late night shoppers normally target bargains at suburban centres on Thursday nights but this week proved an exception with a Singaporean fund grabbing a half stake in a $1.3bn Adelaide mall in a play that has shaken the industry.

Little-known Singaporean company SPH REIT splashed out $670m for the interest, with the metrics of the deal putting on display the cracks emerging in the industry.

For two decades shopping centres have been commercial property’s golden sector, but chill winds from e-commerce, fashion chain collapses and the interminable woes of department stores have caught up with them.

The big investors had seen the writing on the wall with Sir Frank Lowy first selling his international Westfield empire to French company Unibail-Rodamco for $32bn in late 2017 and then severing ties with the local operation last month.

But the Thursday night sale of a half interest in Adelaide’s largest shopping centre, Westfield ­Marion, to SPH REIT for $670m, rung the bell for retail landlords.

Until then big malls had been tightly held by their owners, but the Lendlease-run fund that sold the stake has been hit with more than $2bn worth of redemptions as a major slab of its register wants out.

Meanwhile, the tills in centres across Australia are going quiet, with the sluggish economy making life hard for landlords.

Retail sales increased 2.5 per cent year-on-year in September, below the 12-month average, with stimulus measures yet to spark consumers into life.

Discretionary sales bumped up 2.3 per cent, but UBS analyst Ben Gilbert saw little evidence the Morrison government’s $7.6bn of tax cuts are being spent yet.

“Despite tax refunds coming through, September sales suggest the 1 per cent uplift to retail sales via tax cuts may be optimistic,” Mr Gilbert said.

Department stores and hardware softened, with furniture the weakest category, while electrical, driven by phone sales, cosmetics and clothing, did well.

At the same time the industry is being battered, deep-pocketed offshore groups are looking to snap up properties that local listed and unlisted players are selling at discounts.

Names like German fund manager Commerz Real and US outfit JPMorgan Asset Management have circled big centres but have not bought.

But now the new wave of capital, guided by experienced local hands — in the case of Westfield Marion, SPH is investing via a Moelis Australia-run trust — are looking to buy properties they believe will come through industry woes. The key is picking up assets at prices reflecting their current status and then turning them around. But only the best operators will be able to do this.

The half-interest in the Adelaide super-regional mall is considered the top echelon of the industry. The buyer is taking much comfort from the fact it is half-owned and operated by Scentre Group, which owns the local Westfield empire.

Scentre chief executive Peter Allen said the property was South Australia’s best and it held long-term development potential.

The deal still showed a discount of about 9 per cent to Scen­tre’s December 2018 book value for its half stake, although Lendlease had written back its interest at the end of September so it showed a 2.9 per cent discount.

The sale matters as it was the country’s largest single asset retail transaction this year and is one of the largest globally for 2019. It could also hit beaten down retail A-REITs.

“We believe the most likely outcome is retail values decline in the next six to 12 months as valuers use this transaction as an opportunity to reduce their income assumptions,” Macquarie Equities told clients. They warned low and medium-quality malls, where rents are less sustainable, were more exposed than prime centres.

“With Scentre and Vicinity trading at 11 per cent and 9 per cent discounts to net tangible ­assets, it is easy to build a case for a bottom for these share prices given this transaction,” Macquarie Equities analysts said.

But it said discounts to NTA continued to expand as asset values declined further. “We believe further income-led asset devaluations could occur on a 12-24 month view,” they wrote.

This offers little comfort to existing players.

The Lendlease fund is working through its redemption requests and said the sale was a “significant milestone” as it went through a process of providing liquidity for “a number” of its investors.

Lendlease APPF Retail fund manager David McNamara said retail property was “evolving” due to global thematics but insisted the vehicle was faring well, citing its parent’s ability to create new centres. He said “the fundamentals for Australian retail remain positive with a long-term stable economy, continued population growth and controlled planning”.

Moelis Australia head of real estate asset management Chris Monaghan said the Singaporean buyers would be working with Scentre to undertake an expansion in Adelaide within the next two years. “We are very excited to be involved in such a strong asset,” he said, dubbing the centre “ best in class”.

“We are confident that Marion will perform strongly for them and that the co-ownership with Scentre Group will benefit both sides of the ownership.”

SPH REIT Management CEO Susan Leng Mee Yin said the offshore company was getting more accustomed to the local market after buying Figtree Grove Shopping Centre near Wollongong, with Moelis, last year.

“The acquisition will enhance the sustainability and resilience of SPH REIT’s returns to unitholders through the increased geographic diversity, larger freehold land tenure, and longer underlying leases with embedded rental growth potential,” she said.

Westfield Marion is the 11th-largest shopping centre in Australia, reporting moving annual turnover of $846m, 61 per cent above its nearest SA rival.

The 136,851sq m complex is anchored by David Jones and Myer, as well as Harris Scarfe, Big W, Kmart and Target, Coles, Woolworths and Aldi supermarkets, Dan Murphy’s, Bunnings, an Event Cinema complex and 310 specialty stores.

Such super-regional properties are at the pinnacle of shopping centre investments, and have offered the highest risk-adjusted returns, but their resilience has been tested.

The industry experts who brokered the sale are upbeat about the malls coming through the storm. CBRE head of retail capital markets, Pacific, Simon Rooney said demand for core real estate in the Australian retail market remained consistent, primarily and increasingly so from major offshore investors. “Having been historically priced out of the market by domestic funds, offshore investors are clearly attracted by the opportunity to acquire strategic interests in dominant, high-quality, fortress-style retail assets,” Mr Rooney said.

Colliers International head of retail investment services, Australia, Lachlan MacGillivray said Australian retail’s fundamentals remained attractive globally.

The next test is the race for WA’s largest shopping centre, the $1.2bn Garden City in Perth, being sold by an AMP Capital-run fund. Pricing there is likely to be sharper as the big buyers start to open their wallets once again.