This episode was recorded on the land of the Wurundjeri people of the Kulin Nation. We pay our respects to their elders, past, present and future.
Richard: Hello and welcome to a bonus episode of Precisely Property. I’m your host Richard Temlett. I’m excited to have you with us today. If you’re a long time listener, you’ll know we are taking a short break and working on something exciting for season five. So, stay tuned for that. If you’re here for the first time, thank you for joining us. I encourage you to listen to our previous episodes where we discuss all things property with a focus on dynamic discussions with industry leaders.
In this episode we’ll be talking about the changing retail property landscape, capital, supermarkets and long term value with Don Foulds. So sit back, relax and let’s get started. Don Foulds is a National Director and Retail Advisor at Charter Keck Cramer with more than 20 years of experience advising Australia’s major retailers, investors, developers and finance groups. He specialises in retail centres and mixed-use developments, bringing deep market insights and a proven track record in delivering award-winning projects. Welcome Don.
Don: Thanks Rich, great to be here.
Richard: Don, I’m so excited to have you on the show and also really happy and privileged that you’re the first internal person from Charter Keck Cramer to have on the show. I’ve got to know you over the last six months to a year and I think you’re an absolute wealth of knowledge in the retail space, the retail advisory space. I pick your brain quite frequently just to learn more about retail advisory and the topics that we’re going to talk about today I think are incredibly valuable. I do a lot of work in the residential space, but a lot of the work also actually does cross over into the retail elements. so talking about the trends and what’s happening on the ground and the retail space and a couple of key themes, which we’ll unpack in a second, I think will be very valuable given that a lot of people right now are actually looking at where the opportunities are in the market. And so, just to let our listeners know that the three themes we’re gonna talk about today, the first one is really why capital is pouring back into shopping centres. The next one is why supermarket-based centres are being revalued. And then the one, certainly that’s the most interesting to me and I would be interested to know what our listeners think is why supermarket leases are more important than cap rates. And I must admit, when I read that one, went, oh, this has caught my interest. I need to talk to you a little bit more about it. And it’s actually fascinating to learn more about the leasing structures and things like that and how value can be created and captured. So, I can’t wait to get into this session with you today. So, I suppose let’s kick things off, Don. Let’s start at the top in terms of why capital is pouring back into shopping centres.
Don: Yeah, look, I’ve always really been a supermarket shopping centre guy. And to me, it’s always been a relatively safe industry or sector to be involved in. It does involve everyone. Everyone knows a shopping centre. Everyone goes there. Probably what we had 15 years ago was a few disruptors in the market. Online was creeping in. People weren’t sure about discretionary spend, where that was going. And the whole retail shopping centre market over the last five years seems to have stabilised somewhat people a lot more comfortable with what’s going on with shopping centres. And that’s covering off the large regional, sub-regional, neighbourhood shopping centre markets. I think a big driver too has been the shift from typically the private investors and owners that would own particularly neighbourhood shopping centres and the REITs and LPTs now turning the light switch back on. And again, 10, 15 years ago, many of these were the same REITs getting out of the industry, typically because of lease structures and no lack of growth. Now getting back into the market, it’s recognised as a very stable industry. Funds are coming in in terms of new funds being set up and every month you hear about a new fund with a billion dollars to invest in shopping centres and in a market that’s kind of worth 250 billion, some of these numbers have big impacts in terms of the investment that’s coming in. So, it’s actually turned into a buying market rather than a selling market with the majority of shopping centre owners or particularly neighbourhood shopping centres being approached weekly as if not daily for a sale and the demand from the REITs and the LPTs looking to enter this market.
Richard: Wow. Is that at a national level or is it city or state specific?
Don: Well, I guess, Rich, the good thing about retail is it tends to be a very national industry and state by state, the cap rates tend to be fairly stable across the portfolios. Certainly, the REITs and LPTs are targeting certain sectors, metropolitan locations, supermarkets close to percentage rent and low vacancies and probably cherry picking the lower risk style centres. But as a general rule across Australia, the national cap rates tend to be fairly stable across all sectors.
Richard: Let’s talk about shopping centres and why in your view they’re back. Let’s talk about transaction activity. You started talking about obviously cap rate compression. I’m also interested to know you talk about defensive asset classes. So, what does that all mean for the people that are not as close to the segment of the market as you are?
Don: Yeah, thanks Rich. There’s been a few buzzwords thrown around of late everyday needs, non-discretionary spend. To me, that tends to be more the supermarket with a neighbourhood shopping centre with five to 10 shops around it. Lower discretionary spend and more everyday needs spend. To me, really a key driver has been the fundamental aspect that if you look at a supermarket itself, the tenant actually has value in the property. So, they’re invested in the site and you might’ve read Woolworths profit last year at 2.5 billion. So, if you sort of look at terms of a thousand supermarket, that works out to be about 2.5 million EBIT. per supermarket in value. So your tenant is actually invested in the property as you as a landlord are also invested in the property. And in an ideal world, it comes together where both the tenant and the landlord are investing together to grow the centre, to grow the sales, that can often get challenging and we can talk about that later. But it’s that ideal combination of a tenant wanting to be there and investing in their property and a landlord owning a quality asset and investing in it as well.
Richard: That’s really interesting. I’m keen to just pick up on that point now about just the value of the tenants to the shopping centre. And obviously I’m not as close to the segment of the market as you are, but I did find that fascinating. So, if you have, for example, a neighbourhood shopping centre and you’ve got like a Woolworths or a Coles, and you’ve obviously got a bunch of other tenants in the building, are you talking about the value of, really is it the anchor tenant that creates that value or all the tenants? Do they all create that value or how does that all work?
Don: Certainly, all very closely aligned. The supermarket is always referred to as the anchor or the major tenant is always referred to as the anchor and the supporting specialty shop hanging off that and key for a shopping centre these days is all about convenience and wanting the customer or the customer wanting to go there and servicing their needs. So, the supermarket businesses have been around for a long time. They’re very well-rehearsed and honed in terms of design, getting the right layouts, outcomes, convenience, car parking and accessibility. All of these factors then feed onto the specialty shops. And typically I would say along my journey when I’m designing shopping centres, I’m not just looking at the supermarket, but I’m also looking at the flow for the specialty shops as well to make sure everyone works. You don’t really want a dead end of a centre. You want everyone to work and everyone to move in the right direction.
Richard: Are you, just so I understand, are you able to help with The layout of the sensors, the foot traffic, how the different users interact with one another based on your previous experience.
Don: Yeah, look, I guess along the way delivering so many shopping centres and everyone’s a little bit different in their way, but typically we don’t really start talking about the commercials or rents. It’s really about the design. What can I get there? Can I get the utopia box and layout car park, access and convenience. And then we tend to flow onto the commercials and that side of things. Because often if you can’t make it work from a convenience perspective, it’s always going to be a secondary style centre. So, there’s a lot of effort put into layouts, trolley bays, car parking locations, shade sales, all sorts of elements that you probably don’t really consider. And when you do a supermarket deal, they actually give you a very prescriptive brief in terms of what you have to do, not to scare you off, it’s about 100 meg in size. So, you can imagine what comes across and everything down to size of car parking bays down to the material for the shade cloth in the car park. It’s very detailed to try and make sure everything works in succinct to make the centre flow and work well.
Richard: And so this just to bring our listeners up to speed, you’ve obviously, well, I suppose let’s bring them up to speed. Where have you previously worked and your connections and what are they?
Don: Yeah, look, I certainly moved quickly into property. I started off in local government as a civil engineer, and I certainly moved through the catches of facilitating development and getting things done. And along the way I moved into retail, which was the 7-Eleven move. And that primarily came from meeting the 7-Eleven team, looking to do a development at the municipality I was at and looking for bit of planning, facilitation advice, and then them saying, well, you might actually be a good guy to come and work with us. I moved into their role to get a role out of convenience stores in the CBD. From there, I moved to Coles and I was there for sort of 10 years. And I moved on to Woolworths after that for about 15 years and predominantly been involved in the supermarket businesses the whole journey. So, I know an awful lot about supermarkets, but I wouldn’t say I know a lot about the other sectors.
Richard: Gotcha. Well, look, I wanted to tease out both your stints at Coles and Woolworths because we’re going to get into certain stats and obviously particularly the value created by those leases. But before we do that, why I asked you where you worked is you basically spoke about the design of the sensors and you get the brief. I’m assuming is that brief from the Woolworths or the Coles in terms of saying this is the car parking bays we need, the shade cloth, because that’s a significant amount of bargaining power from a tenant. Is that just because of the size of them in the sector or can you share some thoughts on that?
Don: It probably comes around the volume of deals that the majors need to do each year and both Coles and Woolworths would ideally like to open 20 supermarkets each year, then we can get into volumes later on. But for them to do 20 deals a year, they’ve probably got to be doing thirty because thirty percent tend to fall off along the way. They do have a very prescriptive formula. They do have a playbook in terms of what they can give and can’t give. So you will start off with a four page heads of agreement, which will then flow to an 80-page lease, followed by a 60-page agreement for lease, followed by your 100 meg brief kit, what to fit out. What people probably don’t really understand is when you deliver a shopping centre as a landlord, you do a fundamental amount of builder landlord, lessee works along the way. If you’ve took a shoot supermarket and turn it upside down and shook it out. Everything that’s left is what the landlord provides from the kit. And that’s everything down to tiles on the walls, shade sails in the car parks, backup generators, air conditioning, plant equipment. So, it is a very labour intensive intertwined combination between lessee and lessore from the very start. And that’s probably why it has to be so detailed because a lot of the works overlapping when the tenant comes in to do their fit out, that a lot of those works have to occur before the handover occurs, like drainage in the slab and refrigeration cases and things like that. So, they can be very complicated in terms of delivery, but you do tend to find that there’s a select group and four or five builders in each state that specialise in the delivery of these centres. So, you work hand in hand together along the way. And while all the information is incredibly detailed and onerous, it does actually guide you through the process from start to finish.
Richard: Very interesting. I’m keen to talk a little bit about stats and we’ll keep pushing through a bunch of the topics and issues that I would like to talk to you about. But I know when I was preparing for this with you, you had figures on the number of stores that Woolworths and Coles had. You had the basically the market share. You started talking about how many stores they are trying to aim to open each year. Are you able to just educate our listeners on what the size of the market is.
Don: I guess when we talk about the Australian market, it’s predominantly Woolworths and Coles and together they’re combined sales around ninety billion dollars, which means they represent around sixty five percent of the total food market in Australia. At the moment Woolworths has around a thousand forty stores and Coles has around eight hundred and sixty stores. And I come back to that need for them to grow and drive their store numbers each year and they typically want to grow and deliver another 20 stores each per year. And every year I often thought I was going to run out of stores to find and what I’m going to do, but every year you keep going along. The fundamental driver for that is, is a supermarket chain will open up a new store and they might pick up brand new sales from day one. So they could pick up a $40 million sale from that investment. If they go and refurbish an existing forty million dollar store, they might pick up ten percent. So they don’t really pick up an extra four million dollars. So the big bang for buck is supermarkets opening brand new stores and increasing market share. Now they will do and move with the market what they need to do to get those stores open. And I recall times through the GFC where we turned into banks, and we were lending money to developers. We might get, you know, typically of a twenty store pool, ten stores would be delivered by the private market. Five stores would probably be delivered by the shopping centre majors themselves, so their own in-house development teams, and five would be driven by the REITs and the LPTs. So, this is where you come back to the supermarket and supply chain that the majority of the new stores actually come from smaller privates and one-off deals, not so much the centres and the vicinities and those people of the world. But again, in terms of the flexibility to get the stores open, we talked about funding developments, the in-house development teams might get busier and take on more projects if the market can’t deliver. And in recent times, there’s been a lot of joint ventures happening in the market where with mixed use, you might pile up with a residential developer to do a development. But interesting, we’re at a really peak time now with cap rates and demand, but there were times when it wasn’t so rosy. And I go back to 2012 when Woolworths had kept developing centres and when they developed so many each year they compounded and they ended up with about sixty nine centres and had to set up their own fund and float that off into the market that was the SCA region group at the time. And you know back in those days there wasn’t really a buyer to take on all of those stores so to be a bit creative the retailers went down that path. Around the same time in two thousand and thirteen Coles paled up with ISPT and IFM. and did a joint venture along the way for them to buy out stores at completion as well. And you might have just noticed in twenty twenty six , Woolworths selling a group of stores to Forest Endeavour, ten assets, and that just gets those off their books and they can go again for new stores from there.
Richard: That’s fascinating. I actually did see that headline. All right. As you’re talking, I did have a couple of notes. The first one I wanted to talk about, and excuse my ignorance, I’ve seen that both Woolworths and Coles, they seem to have opened also almost smaller footprint stores. I don’t know. I think you’ve mentioned it to me. I can’t remember what they were called, but you obviously know the names. Is that correct? It’s basically like the smaller footprints, I can’t remember what it’s actually called. Is that, am I seeing things or is that actually obviously part of their deliberate strategy?
Don: No, there are smaller stores creeping into the market. I would say the primary engine driver behind both Coles and Woolworths is full line supermarkets. They’re typically three thousand six hundred square meters. They carry about twenty thousand line items in there. And they like to every store to be the same layout to be the same. It’s a delivery convenience, operational efficiency model. You will see some smaller stores creeping in and there’s the Coles Local and Woolworths Metro.
Richard: That’s it. Yes.
Don: Their success, they really do fill a gap in areas where you’re not going to get a full line supermarket. I wouldn’t say they compete head to head with a full line supermarket. So, if you have a full line Coles next to a Woolworths Metro, the full line Coles will always win. There is a perception with the smaller stores that they’re more expensive to shop in. They have a lesser range, and customers are very unforgiving in today’s market. And if they cannot get their usual product range, they will go somewhere else. Rich there’s really limited customer loyalty between customer wars, maybe about 7%. If you had two stores side by side and you said you were a Coles guy or a Woolworths guy, you’re really going to go to the most convenient centre you can. They have tried to go into smaller convenience style stores and they just didn’t work. And that seems to be a trend that comes and goes now and then.
Richard: That’s fascinating. The other point I wanted to talk to you about just was online retail. And I saw in some of your stats that there’s obviously been the take up of online. But I was also interested in the concept of click and collect. And I remember discussing with you, you’re talking about like that you’ve gone back to saying that the store you like, you’ve observed that the stores they need to have the correct layout and because it just it’s an efficient process. How is click and collect and online retail impacted the layout of the stores, and I suppose just the sector more broadly.
Don: This was often the page in my presentations that has changed the most over the years and It’s interesting to watch the transition grow in the percentage of supermarket sales to online. And I’ve often compared these percentages to overseas, Tesco, Asda, those sorts of stores. So in the Australian market, we sort of kicked off around about two thousand and sixteen with a very humble four percent of sales. So you can imagine a typical supermarket doing forty million dollars in sales a year. So four percent of that being online. Into today’s… that it seems to be leveling out somewhere around about the fourteen percent of sales. And when I talk about online sales, there’s two different elements to that. One is where a customer comes and picks it up from the store and Coles would call that click and collect and Woolworths would call that direct to boot. And then there’s the complimenting home delivery sales where you get the product delivered to your house. What the big shift has really been was you know, back in the early days, it was a two day delivery timeframe and a six hour window when they might turn up to now being a same day delivery service within a two hour time period. So, the actual convenience factor has greatly improved. People still don’t like being locked into having to be at home to get the groceries. People seem to like the going to the store and picking up and controlling technologies grown with this where you can click on an app and say you’re coming and the stock will be ready when you get there and it’s put straight in your boot. The businesses are sort of saying that, you know, the online picking up from the store seems to be the more dominant sector at the moment, more than the home delivery sector.
Advertisement: Quickly interrupting this episode to tell you about Charterket Kramer. Charterket Kramer is an independent property advisory firm with offices in Melbourne, Sydney, Brisbane and the Gold Coast. Through our collaboration with Anderson Global, we connect with over 18,000 professionals around the world. We provide strategic property advisory services spanning multiple market sectors. Our advisory team provides specialist advice across transaction management, tenant representation and lease negotiation, strategic portfolio of reviews, development advisory and more. Complementing this, the Capital Division advises on structured property partnerships connecting property owners and tier one developers.Our extensive valuations coverage includes Prestige Residential and Greenfield Development Markets, together with all commercial asset classes. Quantity surveying is at the core of the project team, ensuring cost control from planning through to post-construction. And our research team delivers property data and analytics across the residential living sector, along with expertise in strategic land use planning and urban economics. With specialists across a diversity of sectors, Charter Kit Cremer is your trusted property advisor. Now let’s get back into the episode.
Richard: The final point or question I had for you before we shift gears into the next theme is just the costs of development and construction costs. And I’m interested to know, I can talk for the residential segment of the market and just how the economic costs of delivery mean that it is extremely difficult to produce financially viable new products. What’s happening in the retail segment of the market with costs? Are there areas where projects are not financially viable or what’s happening in that space?
Don: And look, I guess the difference with the retail operators is they’ve got the flexibility to vary what they’re prepared to pay or do or ask for. Again, their fundamental driver is getting their 20 stores open each per year. So, they’ve had to review what they’re doing, what they’re paying just to get their stores open or their business isn’t going to grow. So now everyone’s going to talk about construction costs and, you know, ten years ago it was two thousand four hundred dollars a square metre to construct a neighbourhood on-grade shopping centre. And in today’s dollars, it’s about four thousand six hundred dollars a square meter. So in 10 years, it’s doubled, consistent to other sectors along the way. Along the way though, the rents have doubled as well. So your million dollar rent to ten years ago is now probably a two million dollar rent. And we’ll get into lease structures shortly. But again, I guess because the supermarkets have this desire to open up stores, they’re being flexible. You might’ve done an agreement with the major two or three years ago at a rent number. You can actually come back to the table and it’s a big part of what we do is coming back to the table and renegotiating terms. And maybe ten years ago that would have been a flat no and you’d just be looking at each other across the table too. Now the majors are revising terms provided it’s reasonable and you can justify what you’re doing because again, they’re primary drivers to get the store open.
Richard: Okay. Talk to me before we get on to supermarket leases, there’s a theme I want to just unpack a little bit more. It’s basically supermarket centres being revalued. Is there anything more you want to add to that, or I suppose why are they being revalued now?
Don: I think it’s the reality of the increased capital investment in the market from the players. All sectors across from the regional shopping centres to sub-regional to NACs have seen an increased interest. And you see the bigger centres and the big significant sums of money being invested into joint ventures there and fifty fifty fund through sort of deals that have kept those going. The sub-regional centres, and again, they have a little bit more of a discretionary spend to them, seem to be back in favour again. They certainly did drop off many years ago. all the people getting back into them now were the ones getting out of them. So it’s been a little bit of a cycle, which is probably a bit of a property cliche in terms of how the industry works. But certainly, neighbourhood shopping centres have been fundamentally chased. There’s also a little bit of a theory that if you’ve got a billion-dollar portfolio that was at six and a half percent and you’ve just gone out and bought another billion dollars at five and a half percent, well by default you’re probably increasing the net value of your portfolio along the way. So I guess it’s that supply of capital coming into the market, just driving cap rates down and the general acceptance that, you know, if it’s probably anchored by a Woolworths or a Coles, you’re going to get your rent paid. There’s very little risk associated with that.
Richard: Very interesting. All right. Let’s shift gears and jump into what I’m the most excited to talk about. It is the supermarket lease. Just a bit of background to our listeners. I know some of you may recall that I’m actually a lawyer by background. During the GFC, I did a lot of work for Westfield shopping centres. I actually was involved in drafting certainly not negotiating but drafting the leases I always found it absolutely fascinating how you could set up very clever terms in the actual lease deals. When we were preparing for this, I was not aware that these leases could be 40 to 50 years in length. That is really significant long periods of time. I’m interested to know because we were talking and you said Rich rather than the cap rates, people need to really understand the supermarket leases. So let’s start talking about that, your experience in them. Why is your view that the supermarket lease is so critical and actually probably more important than the cap rates?
Don: And this has been the fundamental art of supermarket leases along the way and probably explain why ten, fifteen years ago, a lot of people got out of the industry just because of the leases and the way they worked and exposure to outgoings, increases and lack of growth. The supermarket lease, and you’ve got to recall the people you’re dealing with have been doing this for many, many years, and they recycle many, many deals every day, if not every week. So, they’re very familiar with the terms. And I came back to that original statement about, you know, fifty percent of the stores are actually delivered by smaller privates and one-offs. So, a lot of people haven’t got that experience in terms of the fundamental drivers. And I think in this rush of capital coming back into the market, people have bought shopping centres and leases and new projects and not really gone into the detail about how the structure actually works. And there’s a two-prong strategy going on here where supermarkets are very keen to maintain a sustainable occupancy cost level, sales to rent ratio, and they’re probably okay to start off up towards the five percent, but ideally they’d like to see that ratio come down to a two point five percent ratio or three percent ratio, longer term. When I deal with a lot of clients, which I do go through the conversation with them that you have actually signed up on a forty, fifty year lease deal here, tenure, the initial term has changed from ten years ago being twenty years to now ten years. And a lot of that’s been driven by IFRS accounting, which the liability of your lease sits on your books these days. Whereas previously, there was twenty years now it’s ten years. And also shows that I think the supermarkets are looking for a bit of flexibility longer term in terms of what’s going to happen in ten years time. But following that, they’re usually looking for six to eight, five year option periods. So another thirty years along the way. And often I’ll sit with clients and run through a twenty, thirty year cashflow projection and talk them through how the lease mechanics works between, you know, how does my rent get ratcheted and grow? Typically supermarket leases never go backwards, which is why they’re so favourable. Typically, they don’t have market reviews, but their growth is driven by percentage rent. And this has been a fundamental challenge at the moment in terms of people not thinking they’re going to get percentage rent, because the percentage rent threshold is usually driven by a multiple of the base rent. The higher your base rent goes, the higher your threshold goes a million dollar rent might have a forty million dollar threshold. A two million dollar rent might have an eighty million dollar threshold. You might, you know sometimes when I’m reviewing sites, I’ll say, look, you’re not really going to get any growth here for the next twenty, thirty years. So are you accepting this is going to be the rent and where you go from there? Also carrying the lease and the structures is the outgoings and increases in outgoings. Statutory, obviously the Coles and Woolworths pay land tax because they’re that level. But who picks up the increases in the outgoings? Who’s exposed to that? Typically supermarkets drive for semi-gross structures where they don’t really want to get too caught up in increases. So there’s a balance between you as the landlord wanting to see growth in your property and a balance with the tenant wanting a sustainable long-term rental structure because you don’t want the flip side where the rent gets so high relative to sales, they’re going to walk out the door. So it’s a balancing act along the way.
Richard: My goodness. Definitely the devil’s there in the detail. Let’s talk more about the lease risks. I’ve got a note here to talk to you about maintenance and things like that. So, let’s start there. What are some of the lease risks that in your travels, you’d like some of our listeners to be aware of?
Don: I think certainly with the leases, you need to read every word to be frank about the whole thing. I talked about the complexities of the supermarket, and the lessor works that go into the build. So know, lessors will typically own a fair bit of plant and equipment in a supermarket lease. an example might be a backup generator for the supermarket that a power goes down. It could be a heating, air conditioning systems and the like. The lease does come with a very detailed lessee, lessor obligation schedule. And a lot of this is just designed to outline who does what, but key words could be things like at the end of ten years, you must replace something. Yeah, as opposed to the end of ten years, if it’s beyond its usable life, we’ll, we’ll work it out. So I tend to go through and read those words. And you do see trends come up often where the supermarkets have had a bad experience on a particular element in their centres, and they’re trying to push that back onto landlords. So really, it’s just about going through the wording, seeing where the obligations lie. And at least making sure the client understands exactly what they’re walking into.
Richard: Can I ask in terms of actually, I’m assuming Woolworths and Coles have their standard leases. Do they negotiate much or is it basically take it or leave it kind of thing?
Don: No. And again, it comes back to that fact that they need to open up stores. So by and large, they’re reasonable to a point, I’d say, Rich. They want to get stores open. They want them to be practical. There is this challenge at the moment with fixed increases and every year annual increases and things like that going on. It is often a challenge with your original heads of agreement that’s a four-page document that then has these leases and AFL documents attached to them. It’s really important to make sure that there’s a clause in there that says to be negotiated and not on these terms is the one to go for. Yeah, again, a lease negotiation can go for a couple of months, it wouldn’t be unusual to be toing and froing. And every landlord has a different objective or an issue on a particular thing. I learn on every lease myself, even after all this time, I often think, gee, Woolworths or Coles won’t give that clause up and then, you know, I’ve got a stubborn landlord who refuses to pay for something and he’ll argue for that. Typically, the tenant will look for something else in exchange, but it’s certainly that flexibility to get a deal done is their priority. And generally, they’re quite fair to deal with. They do have their barriers they’re prepared to go to.
Richard: I was interested to talk to you in a little bit more detail about just opportunities for mixed use developments. I’ve seen, and again, I live and breathe in the retail, sorry, the residential segment of the market. I often see retail coming into these larger projects. Sometimes even you have, you know, Coles or Woolworths anchoring a building. There’s examples of BTR, for example, where they’ve got like a Coles store. And what is your, what are you seeing on the ground there? What are your thoughts of that space?
Don: This was probably one of the more exciting developments towards the end of my time with Woolworths and Coles. And that was the mixed-use development projects and, having been caught up in a few of themselves. And I, I talked about the lengths that they will go to, to get stores open. And, you know, I’ve got examples where We’ve acquired sites, obtained planning permits for mixed use proposals with retail on the ground level, three hundred apartments above, and then sold them off to developers that would develop them to more recently joint venture style structures to try and get around the cost of capital and are they viable or not to entering the JV deals with developers and profit share profit split. The biggest part or learning I’ve come out of those experiences has been the separating the conflict between residential and retail and the amount of time I’ve spent at VCAT resolving residential complaints and to now having developed a specific mixed use brief to deal with the separation between the plant and equipment. And if you could think of a supermarket with fifteen air conditioning systems in a plant room, and condenser decks and fans that was around twenty four hours a day, to back in the day used to draw a line and say those apartments are above the supermarket. It’s nothing to do with me to going back and sitting in a VCAT hearing and seeing a plan where a bedroom has been drawn on the wall next to your plant room with a bed and a pillow right beside the then perhaps in hindsight, we should have looked at those sorts of things. It probably wouldn’t surprise you Rich to hear that a lot of these developments, the developers or Woolworths or Coles have had to come in and buy those apartments back because you really can’t fix the problems. There’s a very detailed brief and kit that comes with stuff, but often those works and elements aren’t carried out as part of the base build. I’m referring to isolation slabs underneath plinths for plant equipment to stop vibration. The main issue is actually vibration when it comes to noise. It’s not so much the noise, it’s the vibration traveling through the structure. So you can think of a twenty-level building that vibration will travel straight up through the concrete as if it’s in the next room to you. So, you know, a big part of my job is I spend with people with mixed use developments is to get in front and it’s not just the building do’s and don’ts list and what you must do. It’s also then flowing onto an operational management plan to work with the supermarket guys in terms of, can we put some signage up in your back of house areas so staff aren’t noisy? Can we use rubber mounted pallet jacks that don’t clunk on concrete curbs? Can we work together on this? Because the reality is the problem always comes back to the supermarket tenant because they’re traditionally making the noise. And eventhough the developer may not have done all the noise tenuation works, it still becomes the supermarket problem. So you better have to try and deal with it upfront, deal with your separation, deal with your planning and site layout upfront. And, and that’s going to save you a lot of money in the long term.
Richard: It sounds like you’ve definitely got the experience in that sector. So I certainly encourage our listeners to reach out to you if they want to get, as you’ve said, of those issues. One of my final questions for you that I want to talk about, I know you’ve done a lot of work on town centres. I’m keen and we’ll probably be teaming up and actually giving advice to various clients on the development of town centres, the timing, the layout and things like that. What are some of the themes or trends or observations that you’ve seen in your travels, whether it’s from a supermarket perspective or just generally in terms of the development of those town centres?
Don: I think along the way, I’ve really gained a lot of experience from my time when I was in local government, to working with councils. Because often an urban design framework or layout will come from a council or an urban design person who’s not necessarily a commercial person. So often the time you will lose upfront is negotiating a good outcome on a plan and not just having a main street theme centre because someone thinks it’s a great idea, but actually trying to come up with a solution that works. And this is a real answer. I think there’s a compromise there between delivering an outcome that the community will embrace and benefit from. And if you’re a long-term retail person, you’ll want the community to be on board with your design. At the moment, a big catch with town centres and particularly outdoor town centres is very driven by your location. I’ve had a lot better experience in Queensland, better weather, better climates. Sydney outdoor dining precincts, they tend to work a lot better up there. Victoria, unfortunately, Rich, we have the weather problem, and weather protection doesn’t seem to go along with it. Town centres have probably had a little bit of a hard run with the four-quadrant system. And a lot of those haven’t really worked where you have two supermarkets and two DDSs separated by roads and not no connectivity to each other. Typically, car parking underneath and you tend to have a strong quadrant and maybe a half that isn’t just working.
Richard: Very interesting. Okay.
Don: I think the town centre model is lending itself to that, that mixed use entertainment multifaceted approach of trying to make these retail centres serve more than one purpose. So rather than just serving a customer experience, looking to go shopping, it’s a customer that can come there and do a whole range of activities from entertainment, lifestyle, leisure and serve as a multipurpose project. The most valuable sites and it’s a long-term play seem to be and driven by both the major Woolworths and Coles is they like to be around a railway station because I think longer term they do see the traffic and car parking being an issue. And if you can be located around a train centre and benefit from those as well, it’s a win win for both parties.
Richard: Very interesting. The final question from me is the retail landscape and the shopping centre landscape and supermarket landscape. What’s the opportunity or some of the most important opportunities and trends that you see over the next already here, but over the next twelve months?
Don: Yeah, again, I think Rich, because there’s limited customer loyalty between the stores and you know, it’s someone once said to me that there’s a lot of people in the community that don’t actually talk to anyone on a daily basis, their only interaction with someone can be when they actually go shopping at the supermarket. And you’ll notice when you go to a Coles or a Woolworths that the team members on the front counter always say, hi, how’s your day going? And that’s really important element to me that people stay connected and that these essentials, I talk about essential service and that was a little bit leftover COVID when anyone that worked in supermarkets was an essential employee, you could move around quite freely. But I think it’s, long as they’re still staying connected with the community and providing that service, because there’s a lot of a push towards lower cost, self-scanning. To me, a supermarket hasn’t really changed much in twenty or thirty years in terms of design layout. You walk through, there’s a fresh food area, there’s a bakery, there’s deli meat prep around to the right. You walk around through past the dairy section, you walk past a range of dollar groceries and freezer on the way out and a BWS or a Lick-a-Land on the way out to finish a cycle. To me, it would be great to see a little bit more innovation in terms of what they’re offering. There’s certainly a big focus on cost from both players at the moment. Margin is being pushed and lots of other drivers impacting that. Again, these are public companies that need to make a profit. So, while we say they’re a community asset, they still need to make a profit. I would probably like to see a little bit more innovation from them. Some of the slower take up things have been, you know, car charging stations in car parks and, you know, catch between a two hour fast charge or twenty four hour slow charge and, you know, could you go and do a hundred dollar shop and get a free fast charge, things like that can be done a whole lot better. Unfortunately, I think a lot of the supermarkets are going towards this lower cost option and almost to the point where you could put all your groceries in a shopping trolley and just push it through it scan, then you tap a card and leave. As opposed to that customer centric, customer first style approach that has been there in the past.
Richard: That’s fascinating. You could probably do an entire episode on that, that topic in itself. I know we’re running a bit short of time today. Just to close out, did you have any final thoughts that you wanted to leave our listeners with?
Don: No, look, I just think the retail markets’ been an exciting time in the market and everyone talks about construction costs going up and certainly the increase or improvement in cap rates and supermarket rents has made them more viable to deliver. Supermarkets and shopping centres are a living, breathing asset. They’re not a buy, set and forget style asset. So the more successful centres have been the ones where the owners spend a lot of time in them. And you think about some of the traditional families like the Gandels and the Altas and the Loewys. They were all based in their big shopping centres. They all ate in the food courts.
Richard: Very interesting. Okay. Yep.
Don: Familiar with all the tenants. And I walk around, there’s a lot of, you know, private landlords that we look after. And when I walk around their shopping centres with them, they all stop and talk to the tenants. And I’m always impressed about, you know, how connected they are with their tenants and interested in their businesses. So again, you buy a shopping centre, I think you buy a living breathing asset and something you can’t just really just bank as an investment vehicle.
Richard: That’s a very interesting way. I’ve not appreciated the people elements in the retail opportunity. All right, well Don, look, thank you very much for coming on the show and sharing your ideas. Certainly, I’ll be pointing people that reach out and I encourage everyone to reach out. We’ll be doing also just an insight, summarising a lot of what was discussed today because I do feel there’s a wealth of information that people need to be aware of with their investments and their developments decisions, whether it’s just the pure play retail or if it’s also a mixed use type of development or even for government with the development of their various town centres and that alignment with transport that Don is so well highlighted. So Don, thank you very much again for coming on the show and I hope you have a really good rest of the day.
Richard: Hi everyone, I hope that you enjoyed the session with Don today. I certainly found it fascinating. All things retail, all things supermarkets, and all things shopping centres. The three findings that I think that I would like everyone to just go away and reflect upon a little bit more are as follows. The first one is Don made a comment about shopping centres being living and breathing assets. I think that’s a very important consideration and certainly not really one in my former life as a leasing lawyer that I’d really considered. But basically, the fact that it’s living and breathing just suggests to me that you can make commercial decisions as the actual asset and the tendencies evolve. They evolve and they mature. And I think that’s a very clever way to look at it rather than quite simply as a return on investment, which is quite clearly not the case. The second finding I think also which is quite relevant is really the value being in the lease. I hope that Don really convinced you just while and how we articulated today just the significant value that lies in those terms and conditions of the lease. And certainly, I’d be either reaching out to Don or getting a retail and commercial leasing lawyer involved just to help you really make sure that you both not just protected but also can maximise the upside just in terms of the value of the lease. Finally, the point that also became very clear to me is that Whilst there is the resurgence of the retail centre and shopping centre investment, it’s less so actually about retail and much more so about capital chasing, defensive income, and then matching that up with population growth, supermarket dominance, and then the long-term lease structures. And I think that’s really important to just keep in mind in your investment and your development decisions for this particular asset class. That’s all I wanted to say today. I hope that you have a good rest of week. Thank you very much.
Thank you very much for listening to this podcast. If you enjoyed the episode, please make sure to subscribe to our podcast so you never miss an episode as we’ve got more exciting content coming. We’d love to hear your thoughts. Please leave us a review on either Spotify or Apple Podcasts as it really helps us to grow. Also, follow us on Instagram @PreciselyProperty for updates and join the conversation. If you’d like to get in touch with us, subscribe to our newsletter via our website, charterkc.com.au or writes to us at podcast@charterkc.com.au. Lastly, if you found this episode interesting, please share it with your friends and family. Thank you again for listening and stay tuned for our next episode dropping in two weeks’ time, plus bonus content also on the horizon.
Disclaimer: Precisely Property is a podcast presented by Charter Keck Cramer and is for educational purposes only. Nothing in this podcast should be taken as investment or financial advice. Please engage the services of an appropriate professional advisor to provide advice suitable to your personal circumstances. The views expressed by our podcast guests may not represent those of Charter Keck Cramer.