The market for shopping centres is affected by both micro and macro economic conditions – which impact upon business investment activity and consumer spending patterns. Economic conditions and sentiment drive consumer demand, which in turn, determines the need for items such as housing, groceries, clothing and health services etc. Higher consumer spending results in increased business activity, which in turn leads to increased demand for retail space and hence, increased rental values. Shopping centres in Australia can typically be categorised into the following:
Categories are generally determined by size and tenancy mix.
The sales of shopping centre assets are handled by commercial real estate agents who typically charge a commission on sale. Valuation of these assets can be required for various reasons, including:-
Purchasers within this market segment mostly comprise investors (both institutional and private), however, some of the major supermarket chains acquire assets from time to time.
There are many different methods for valuing a shopping centre, however, the overall concept is common for each valuation.
International Valuation Standards (IVS) 2007 details the definition and application of valuation approaches for valuation reports as follows:-
Valuations of any type, whether undertaken to estimate market value or a defined non-market value, require that the Valuer apply one or more valuation approaches. The term “valuation approach” refers to generally accepted analytical methodologies that are in common use. In various States these approaches may be referred to as “valuation methods”.
Market based valuations normally employ one or more of the valuation approaches by applying the principle of substitution, using market-derived data. This principle holds that a prudent person would not pay more for a good or service than the cost of acquiring an equally satisfactory substitute good or service, in the absence of the complicating factors of time, greater risk, or inconvenience. The lowest cost of the best alternative, whether a substitute or the original, tends to establish Market Value.
In most instances, shopping centres are valued using either a capitalisation or variation of a Direct Comparison approach. Larger centres can also be valued via a discounted cash flow analysis. When determining value, a valuer will, in most instances, utilise two (or more) approaches.
Value is inherently linked to specific attributes of a respective property. These attributes include, but are not limited to, the following:
A key determinant to value is linked to the success of the major tenants within a centre, usually referred to as ‘anchor or major tenants’. The anchor tenants act as a drawcard for smaller, specialty tenants and often represent a large portion of rental income. Anchor tenants, such as Woolworths, Coles, David Jones and Myer are generally publically listed companies and as such, the security of tenure is perceived to be high. The proportion of rental income of anchor tenants therefore correlates with the investment return (yield or IRR). That is, as the percentage of income attributed to the anchor tenant/s increases, as does the security of tenure, which results in an increase in value.
Specialty tenancies on the other hand, are typically occupied by smaller operators along with franchisees. These tenancies are considered to be more ‘risky’ and hence, all else being equal, would reflect a higher investment yield on an individual basis to an anchor tenant. Key factors to consider in providing valuation advice on shopping centres include:-
After taking all of the above into consideration, a market capitalisation rate is applied to the net annual income. The appropriate capitalisation rate is derived from comparable sales evidence, with relevant adjustments made to account for specific attributes of the subject property. Comparison with similar shopping centres which have sold in the market place can also be drawn from a $ rate per square metre of lettable area.
It is important to note that there are many other factors considered in applying value to a property. The above commentary is designed to provide an overall snapshot of the process involved in valuing this particular asset class. For further information, please contact Commercial Valuations Manager, Luke Chadwick.
