Sep 11 2018Add to Favorites
I recently walked past an installation marketing my favourite champagne, Veuve Clicquot. Aside from loving the champagne, I love the story behind the brand. 27-year-old Barbe-Nicole Clicquot was the first woman in history to run a champagne house, and who in 1866 bought sales from 8000 bottles a year, to over 750,000 bottles.
So, this installation was a bright yellow old-school phone booth and a bunch of empty Veuve magnum bottles, and it invited social media photos and requested a hashtag. I was sold, and had my five minutes of fun, mucking around and taking photos. Aside from making me laugh (at myself), it got me thinking about how consumer engagement has evolved significantly based on our digital life and how that evolution in consumer engagement is affecting retail brand performance.
The influence of technology on real estate.
Although we talk about real estate being an enduring investment asset class overall and unable to be outmoded by advances in technology, technology certainly shapes its use and evolution. The advent of online shopping, the Amazon effect and the evolution of the Australian population, with Millennials officially outnumbering Baby Boomers or generation X’s, mean that shopping behaviour and shopping centre performance as a property asset class has declined in a lot of secondary centres in the recent years as a result of poorly performing traditional retail tenants.
Read more here on Millennials taking over Baby Boomers as the largest segment of the population.
The big numbers.
According to the September 2018 issue of the Savills Property Economic Drivers Report, Australia’s economy grew 3.4% in the year to June 2018 on the back of stronger than expected household consumption. Excitingly, this was the strongest rate of economic growth Australia has experienced since the mining boom in September 2012.
Australia’s population reached 25 million people in August 2018, circa 30 years ahead of official forecasts made in 1998 by the ABS. If we are growing faster than forecasts and we are anticipated to reach 10 million people in Sydney (NSW) by 2036 from 7.7 today, that's an exciting prospect for both our economic growth and each of the Australian the real estate sectors. Read more here. Total employment grew by a strong 2.4% over the year to July 2018 buoyed by NSW, Victoria, and Queensland
Whilst according to this latest Savills report retail property, namely shopping centres, were the worst performer over the year to June 2018 at 8.4% when compared against national office performance at 14.7% and industrial at 12.5%, we see the CBD- centric retail shopping centre sector as an opportunity moving forward.
As the brave new world of retailing evolves driven by technology and population demographics, it's fascinating to watch the change take place. What would be considered traditional retailing is in decline and shopping centre owners have to make the decision to exit or commit to the capex to move with the evolution.
What is interesting is that the essence of retailing, in its truest form, pioneered by the Harry Selfridges and Mark Foys of this world, still remains and the centres that have been able to capture that essence, still perform sensationally in terms of Moving Annual Turnover (MAT).
A 'destinational' day out, & a place to interact.
These visionary entrepreneurs that created retailing as we know it; Harry Selfridge, when he opened Selfridges in March 1909, captured the essence of consumer engagement at the time, with fanfare and unprecedented media engagement which attracted crowds from afar and international attention to his vibrant curated window displays, events, and experiential marketing. Selfridge enlisted the help of thirty-eight of London’s top illustrators to draw hundreds of full page, half page, and quarter page advertisements for eighteen newspapers. At the time, this innovative combination of direct advertisements and newspaper publicities proved to be quite effective at drawing the crowds to the store. Inside the store, the string quartets, the subdued lighting, installations, and customer service were reflective of six-star hotel service and deliberately designed to make shoppers feel special, unique and seduced into a buying decision.
In modern times, life is faster, more digital, social media and 'influencers' have taken the place of traditional newspapers, and consumer engagement is ever-elusive. However, our growing population still needs places to interact and everyone loves to be entertained and seduced into a buying decision.
As convenience is replaced by online shopping, or bulk-discounted supermarkets, the traditional big-box “anchor” supermarkets are less reliable in attracting foot traffic and the evolution is towards a ‘destinational day out’ which is experience based and entertainment focused.
A few weeks ago, I visited the David Jones Elizabeth Street Floral Installation and it was amazing to see the families gathered around the curated window displays, the installation floors of the store were so crowded that people spilled from open doors on the footpaths, vying to get inside.
The only visible difference between this modern day scenario at David Jones and the old Selfridges and Mark Foy's black and white photos is that people were wearing sneakers and jostling to take selfies on their phones for social media (so it's not just me!).
Social media has become such a big factor in communication and engagement. Retail groups like David Jones are cleverly choosing brand ambassadors now based on social media following numbers and 'Influencer status' due to direct results with cut through, engagement and the resulting measurable ROI.
Similarly, Ashe Morgan, the owners of Melbourne District Docklands center, has a new permanent tenant, Artvo that has a focus on engaging via social media. Artvo has over 100 installations that visitors can snap on their i-phone where visitors can become a part of the 3d installation art. District Docklands, is also home to a brand new Hoyts cinema complex, due to open November this year, and Australia’s largest beer distillery & pub, due to open this month, creating a food and beverage -based destination entertainment precinct.
As apartment living becomes the norm for a lot of families, kids and family entertainment becomes an increasing focus for a day out as well as activating space with high-quality food and beverage offerings.
The concept of experiential–based reinvention, to consistently attract a consumer is one that hospitality tzar and BRW-Rich-Lister Justin Hemmes knows well, and this is the direction that retail will take, evolving towards high-quality entertainment, food and beverage, and hospitality as the anchors to attract foot traffic.
How it gets spent.
According to a September 2018 article by ABC online, Australians spend eight of every hundred of their retail dollars online. In the US, that figure is more like 10. In the UK, it is 17 dollars out of every hundred. This same article quotes that there are 1.3 million Australians working in retail, which is likely to evolve with the changing nature of retail.
Walking into successful shopping centers like Broadway Shopping Centre, Westfield Sydney CBD, Chadstone Shopping Centre in Melbourne, Westfield Bondi Junction, or a Chatswood Chase, there is a hum of activity and the sense of aliveness or vibrancy is palpable. The vibrance in these centres translates in commercial terms to high MAT levels, which mean investment success for the owners of the centre.
With entertainment venues like Sydney’s Wet and Wild overcrowded and inconveniently located, its clear that we will travel to be entertained, but just what does this brave new retail shopping-cum-entertainment centre look like?
Aside from the new technologically driven disrupters, there is also the evolution in the consumer- behaviours of the changing Australian population demographics. Millennials have over-taken Baby Boomers as the largest portion of the NSW population and this also has an effect on the evolution of consumer- behaviour. Read more here.
The evolution and the opportunity.
In the listed real estate REIT space, groups that have a large shopping centre portfolio include; Vicinity, Charter Hall, Mirvac, Lendlease, Scentre, Frasers, GPT, SCA Property Group, ISPT, AMP among others.
According to the International Council of Shopping Centres (ICSC), in America, the shift away from traditional apparel retail is already making itself felt. Food and beverage now make up 9% of leasing space in U.S. Industry executives expect that ratio to grow significantly. Adapting to trends like these costs money and is likely to pinch REIT profits, which may create an exodus from the sector (which is where MP Funds Management sees the opportunity).
Investment value is largely attributed to predictable investment income and behaviour of the asset class being investing in, old retail shopping centre methods for success are fast becoming less effective in producing compelling levels of MAT. Retail property behaves differently from other real estate asset classes like residential, industrial and commercial office. Given the convergence of factors already mentioned, the key drivers that makes retail property and shopping centres a successful investment are evolving quickly and significantly.
What draws a crowd and encourages spending?
What draws a crowd, keeps the crowd for a period of time, creates repeat visitation habits and encourages high levels of consumer spending?
According to a recent Fortune article, having an Apple Store in a Centre increases visitation and spend by 10% as an overall for the centre, a Tesla showroom is also a significant drawcard for foot-traffic.
Interestingly, the highest trading shopping centre, measured by sqft, in America is the Forum Shops at Ceaser's Palace, owned by listed Simon Property Group, the centre is overflowing with luxury brands and is reflective of the unique catchment of global “high rollers” and is perfectly positioned to take advantage of cashed-up consumers.
By comparison, in Sydney, Mirvac’s Broadway shopping centre is the highest performing centre with a MAT of approx. $14,000 per sqm and without a luxury brand in sight.
Simon Property Group owns about 325 retail shopping malls with a total gross lettable area of about 22,400,000 sqm across America and Asia.
At an investor conference in June 2017, CEO of Simon Property Group, David Simon predicted, “You’re going to see, at the end of the day, the better malls will get bigger and better and more diverse, and some of the other fringe retail will suffer.” It’ll be his job to keep the family business as far as possible from that fringe.
2017 reports show that Simon’s U.S. malls and outlets were 96.3% full (four percentage points above the industry average). Sales per square foot were $604, 27% higher than the industry average of $474, according to ICSC.
Simon’s shares, which reached an all-time high of $229 in July 2017, had fallen more than 21% by mid-November, reflecting concerns about how many of Simon’s tenants are struggling. Aside from anchor traditional anchor tenants declining in performance, two of Simon’s three top tenants, Gap Inc. and Abercrombie & Fitch, have closed hundreds of stores in the past two years and have announced more expected closures.
Reinvention is key and Simon Property Group has $1.9 billion worth of capex for installations, social media influencers, marketing, renovations and new projects in the pipeline. Simon recently completed a $200 million overhaul and expansion of the King of Prussia mall—adding space for 50 more stores in what’s already the second-largest mall in the U.S.
Based on the value that we see in the evolution of the shopping centre space, MP Funds Management currently has a shopping centre mandate which we are actively looking to execute on, over the last several years we have invested $287m and produced a gross investor IRR of 21%.
MP Funds Management update 1st Oct 2019 and investment pipeline: MP Funds Management has completed its co-investment into the acquisition of a 52,000sqm office asset in Brisbane CBD, right opposite the railway and with 98% of rental income underpinned by government tenants.
MP Funds Management has provided investment funding for approximately $1.3b in unlisted real estate since 2013 and has provided an investment return of approximately 21% annually. Whilst MP Funds Management focuses on unlisted real estate, I am always fascinated by innovation and I personally will sometimes invest in other areas. Recently I caught up with the founder of a very clever new Australian – based app called Stake https://stake.com.auwhich is a Business-to-Consumer based platform that enables Aussies to get direct exposure to the USA equities market.
United States of America
In November 2014 we co-invested with another Manager into the acquisition of a 13-level North Sydney CBD office tower for a purchase price of $36.75m or $4,665 per sqm. A total of $19.5m equity was invested with a gearing ratio of 65%, debt was locked in at a rate of c.4% for the intended five-year investment period.
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