Why HNW investors are choosing shopping centres

As demand for consistent cash flows continues to rise for wealthy investors, commercial real estate assets, like shopping centres, continue to draw significant interest to fulfil the need, MA Financial said.

MA Financial co-head of core real estate Greg Miles told Financial Standard over the past few years, offices have been a more "traditional" space for real asset investment - but high-net-worth (HNW) investors and family offices "aren't buying into the recovery story" just yet.

He said the fundamentals of office assets have not necessarily "settled down" in the context of persistently high rents, with incentive and capitalisation rates signalling weaker tenant demand and an oversupplied market.

Instead, investors are now shifting focus towards commercial real estate, which Miles said generally carry better cash flows from assets like shopping centres.

"[Investors] now understand the consistency of cash flows that can be generated from retail businesses, and at its core, real estate is critical to people's operating businesses - as opposed to office, where most businesses don't care where they're specifically located," he said.

"But if you're a business, the value lies within that location."

Despite current volatility in the economy, rather than shutting a business, vendors tend to pass on ownerships to sustain a constant income for investors, which is a script that's been playing out since the pandemic.

"Pre-COVID, at the peak of larger centres, occupancy costs were up around 19-20%, but through COVID, with growing sales and the delayed effect of being able to grow rents, occupancy costs tend to be down to around 15%," he said.

"Sales could decline; occupancy costs could move up... [but] retailer's ability to pay rent remains very solid.

"And most rents contain a fixed annual escalator. They typically grow at either 4% or 5% p.a. in most locations. You get the ability to reset them to a different rent when the lease expires, which are typically five-year terms."

Other than rent, Miles said other profit avenues stem from causal mall leasing, car park income, media campaigns and advertising within the establishment.

These assets are also extremely scarce and limited due to the restriction and regulation around the establishment of commercial districts, which require extensive approvals from local governments and councils.

The expansion of commercial real estate is also being hampered by residential developments to solve the housing crisis where opportunities are simply running out, Miles said.

"There really isn't going to be an increase in supply [in this sector]. Some sites are being redeveloped... But the ability to get together a 10-20-hectare site to build a shopping centre in metropolitan areas is pretty much done; the ability to build large scale is not possible at the moment," he said.

Miles said MA Financial's position the regional market also led to great investment outcomes, including the divestment of Victoria's Mildura Central last year, which generated a 17% internal rate of return (IRR) for investors.

Most regional shopping villages are also anchored by supermarkets.

"Regional towns can be very strong - we still own supermarkets in Goulburn, Cessnock and Bega. Typically, supermarket sales are as strong as metro areas and can sometimes provide more growth from elements like tourism and growth in population of these areas," he said.

"The productivity from these towns is also really promising - these locations are equally as profitable to invest as some metropolitan areas."

Responding to the fluctuations observed in retail spendings, Miles said it is not surprising to see the metric moving in cycles, but there is no direct correlation between a retailer's sales performance and what an investor can earn in return.

"Because retailers have a base rent [which] is fixed. When sales performance varies, it's an impact to the retailer's profit and loss statement (P&L), not to the shopping centre owner," he explained.

"So long as occupancy costs remain within an acceptable range, there's no impact to the owner. In reverse, if sales were to jump 20%, then retail shopping centre owners aren't necessarily going to get an immediate cash benefit. Equally, if they drop by 20%, we're not going to suffer a cash decline."

The threat from digital consumer spending has also since "stabilised", Miles added, highlighting that only 12% of total consumer transactions were online over the past year, which is a number much lower than other economies.

The group remains bullish in the sector, now transacted some $500 million worth of retail assets in 2H26, including the acquisition of a 50% interest in The Glen Shopping Centre in Melbourne, and the launch of the MA Large Format Retail Fund targeting a portfolio size in excess of $500 million.