It was the second year of the global pandemic. Migration to online shopping was in full flight, with shopping centres shuttered in lockdowns. Then stakes in two of the country’s most successful shopping centres came to market.
Australia’s Largest Retail Transaction
Pacific Fair on the Gold Coast and Macquarie Shopping Centre in Sydney’s north became available when their owners, two foreign investors – Canada’s CPP Investments and the Abu Dhabi Investment Authority – chose to divest their stakes in what was then known as the AMP Capital Retail Trust. A third investor in the Trust, AMP Life Property Fund, had already opted to sell out during an unsettling period when its manager, AMP Capital, was itself fielding bids to take over the business.
The sale became Australia’s largest retail transaction yet. UniSuper and Cbus Property (the wholly owned property arm of Cbus Super) stepped in in October 2021 to buy the centres for A$2.2 billion. Today, these two super funds own 100% of Pacific Fair and 50% of Macquarie Centre. Management rights for Pacific Fair has since been transferred to GPT Group.
Despite prevailing pandemic-induced uncertainty in the retail sector, UniSuper’s head of property, Kent Robbins, did not hesitate to seize the opportunity to buy.
“I had wanted to buy Pacific Fair for more than a decade,” Robbins told [i3] Insights. “Then there was this exceptional opportunity, which you may come across maybe once in your career. It was as good at that.
“We pride ourselves as a counter-cyclical investor. We were buying retail when people were saying retail was dead – that online retail was going to kill bricks-and-mortar shopping. To top it off, it was the middle of COVID, when these centres weren’t even open for trading.”
As UniSuper spent up big on retail, some global investors — like Singapore’s sovereign wealth fund, GIC, ADIA and CPP Investments –were bowing out of the sector. GIC sold the iconic Queen Victoria Building and Strand Arcade in Sydney’s central business district and last year also disposed of its half interest in Chatswood Chase, in suburban Sydney.
We pride ourselves as a counter-cyclical investor. We were buying retail when people were saying retail was dead - that online retail was going to kill bricks-and-mortar shopping.
UniSuper also owns Karrinyup Shopping Centre in Perth. In 2021, the industry fund completed a major redevelopment to double the size of that centre – a project that cost $800 million and took three years to complete.
It was co-owner of Karrinyup, initially with Stockland and later with the Westfield Group. Then, in 2013, UniSuper was able to buy out Westfield in a $247-million transaction, paving the way for major redevelopment of the asset.
It is with considerable satisfaction that Robbins tells [i3] Insights that these centres have outperformed other asset classes in net – with “net” being the operative word – operating incomes.
“Clearly, from a sector point of view, retail is generating very strong income,” says Robbins, adding, however, that performance is very asset-specific. “As a guide, the net operating income of Pacific Fair was up 8% at June 30 against the previous year. Karrinyup was up 9%. It is true that the discount rate and cap rate have moved out, but these are still positive returns.”
The top-quality retail asset sector is a high conviction play for Robbins. Besides direct ownership in three of Australia’s best performing centres, UniSuper is also the single largest shareholder in two listed shopping icons – Scentre and Vicinity Centres.
Demise of Shopping Centres?
Fears that online retailing could lead to the demise of shopping centres have been overblown, according to Robbins.
As he sees it, online retailing and shopping centres have evolved to co-exist. There is almost a symbiotic relationship, particularly for big brand retailers and fortress malls as they grow their so-called omni-channel business strategies.
“Retailers want fewer stores, but they want them to be in fortress malls,” explains Robbins, “When retailers put a flagship store in a quality fortress mall, their online sales penetration around that centre catchment area increases. It is sort of counter-intuitive.
“They put their flagship store into a fortress mall and that drives online sales. It is about confidence in products; people can view and feel before buying online. They can also return in-store. A presence in a mall is about showcasing a product.
“The best quality retailers know they need the best possible store and the best online offering. They are the winners going forward and they know that pure online doesn’t work nor does pure bricks-and-mortar. You need the very best shopping centres; ultimately it means strong fortress malls.”
Quality Retail & Fortress Malls
UniSuper has been strong on retail thematics for more than a decade. “We are big believers in retail,” says Robbins. “I am at pains to point out that quality retail is very different to retail in general. There has been no retail (super regional mall) construction for the best part of five years now. You have population growth and what the pandemic showed us is that people don’t want just shop online; they want to physically shop as well.
“UniSuper has a property portfolio of $8.5 billion, with its three fortress malls accounting for a sizeable chunk of that. It also has another $6 billion in listed global and domestic property securities, mainly in three large ASX-listed REITs (real estate investment trusts): GPT, Vicinity and Scentre.
According to Bloomberg, UniSuper holds a 16.3% stake in GPT, 11.3% in Scentre and 8.3% in Vicinity. Robbins describes these positions are “a bit historic”. The fund started buying securities in the three companies more than a decade ago.
We are big believers in retail. I am at pains to point out that quality retail is very different to retail in general
“A large portion of those positions sit within our defined benefit funds, and the yield on original acquisition price well-and-truly meets the liabilities of those funds,” Robbins says. “They are ideal assets given their stability of income – regardless of what their share prices are doing, and they have been volatile. But distributions on these three vehicles have been very secure.”
Growth in Net Operating Income
The salient investment case for the assets is strength in net operating income. “Maybe we are old-fashioned, says Robbins. “Our view is that real estate is built to generate net operating income (NOI) growth. NOI used to be all that mattered.”
“But over the past decade, it has been more about cap rate compression, so when I look through the sector and the market, it is very clear that there is an increased cost of equity and there is an increased cost of debt. Operating costs, such as cleaning contracts and wages have gone up.
“Really good quality real estate is growing its topline ever more strongly than operating costs. It is posting good returns. Clearly, if you are in both retail and logistics, your sectors are so much stronger than the rest of the market.”
__________
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.