Finding value in retail

Alibaba announced sales of $38.4bn on Singles Day (November 11) this year, up from $30.7bn in 2018, demonstrating the power of e-commerce, says Pius Ho, managing director of real estate and private equity/real assets, at Barings Alternative Investments.

“There is no denying e-commerce and the disruption on-line shopping has brought to traditional forms of retail,” he says. “Regional malls, neighbourhood centres and high-street retail are all going through an industry wide shake-up with sales volumes down, vacancies up, rental rates falling and cap rates expanding. Yet these bricks-and-mortar forms of retail will need to find a way to co-exist with online shopping.

“In 2020, real estate investors should look for value propositions in retail where stock selection and active management are fundamental to success. Focus on those located near transportation hubs, within dense residential neighbourhoods with an opportunity to create a tenant mix complimentary to on-line shopping, while integrating F&B and entertainment to enhance the shopping experience. Within APAC, gateway cities including Tokyo, Seoul, Singapore, and Shanghai can be considered.”

Adapting to a weaker leasing environment

Andrew Moore, chief executive of Hong Kong-based investment manager Pamfleet, which closed its third Asia Pacific real estate fund at $450m in June, says dealing with a slower leasing environment will be crucial.

“I will be looking out for the different ways investors adjust to weaker leasing markets in 2020,” he says. “Based on most analysts’ forecasts, occupancy will be hard to achieve and rental growth non-existent, with declines more likely. Landlords will need to fight hard to find or retain tenants.

However, he notes that equity capital is still plentiful, interest rates (and some managers’ return targets) are lower, and banks will continue to provide debt for re-financing, although they may have less risk appetite for new loans.

“Faced with this scenario, it will be interesting to see how investors approach the market. Whether the strategy is opportunistic, value add or core, what assumptions will they make and at what price level will they re-enter the market?”

Further reading:
Barings
Pamfleet

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