In announcing its 2018 results today, shopping centre landlord Vicinity Centres (ASX: VCX) updated investors on its strategy to minimise the impact from the rise of Amazon (NASDAQ: AMZN) and online shopping in general.
Vicinity is implementing its strategy in a number of ways.
Selling its less valuable centres
Unlike fellow shopping centre landlord Scentre Group (ASX: SCG), the owner of Westfield in Australia and 16 of the top 25 grossing centres in Australia, Vicinity owns a more diversified portfolio of malls. Its direct portfolio consists of 74 assets ranging from the most valuable super regional, regional and city centre malls to the smaller, less valuable sub-regional and neighbourhood shopping centres.
This is the result of Vicinity being created by the merger of Federation Centres (the old Centro Retail) and Novion Property Group (formerly CFS Retail Property Trust) in 2015.
So the first part of Vicinity’s strategy has been to shed its smaller, less valuable assets, selling 24 assets for $1.9bn since the merger.
Vicinity had also previously announced an additional $1.0bn in divestments proposed for 2019, but just last week upped that figure to $2.0bn.
The additional $1.0bn will be achieved via contributing $1.0bn in assets currently on Vicinity’s balance sheet into a wholesale fund, in which it will own a maximum of 10% and also manage on behalf of other investors.
Vicinity also recently completed an asset swap with Singapore-based GIC, swapping a 49% interest in its Chatswood Chase mall worth $562m for half interests in GIC’s Queen Victoria Building, The Galeries and The Strand Arcade in the heart of the Sydney CBD (worth a combined $556m).
Expanding its more valuable centres
As for the larger, more valuable malls that Vicinity prefers, opportunities to purchase them are few and far between and a merger with Scentre Group would probably be knocked back by the ACCC.
In any case, trophy malls are currently expensive due to very low capitalisation rates: for example, Westfield Sydney is now valued at $5bn, Westfield Bondi Junction at $3.1bn and Vicinity’s very own Chadstone at a staggering $6.1bn (alas, Vicinity only owns half).
Moreover, opportunities to develop new, large shopping centres from scratch in attractive catchments are as rare as hen’s teeth due Australia’s restrictive planning laws.
So it makes more financial sense to improve and expand Vicinity’s existing high quality properties, and it has spent $800m doing so since the merger. An additional $435m in development is currently underway, with more projects still in the planning stage.
Vicinity is also exploring utilising its retail portfolio for alternative uses such as offices, residential or hotels. For example, after recently building a 13-story office tower at Chadstone, it has commenced construction of a $260m (Vicinity’s share is $130m), 250 room hotel nearby.
With a number of its properties located in areas which are desirable places to work and live, at this early stage the company has identified 12 further projects worth an estimated $1.0bn, with more surely to come.
Vicinity’s goal is to own a portfolio dominated by “destination” shopping centres: large shopping centres with little or no competition, easily accessible via public or private transport and located in catchments with higher than average population and income growth.
And the final way in which Vicinity is trying to combat online shopping is to transform its malls to emphasise “experiences”. This involves emphasising retailers that offer services such as food, drink, entertainment, childcare, gym services and so on, all of which are less likely to be affected by the rise of online retail.
So while there aren’t any guarantees, all these moves should place Vicinity in good stead to withstand the onslaught of Amazon.