Sunday, March 4, 2012

Cairns Central

A retail crisis and recessed regional economy doesn't seem to have stood in the way of exansion plans for local shopping centres. Woolworths are currently challenging the council rejection of their Gordonvale plans with opposition from Mulgrave Chamber of Commerce. Approval for expansion at Redlynch has been appealed by rival centres at Smithfield and Cairns Central.

Preliminary plans for an expansion of Cairns Central have also apparently been discussed with Council. Suggestions that it could double in size would create a very large centre for a regional location, comparable in size with metropolitan centres such as Carindale, Pacific Fair or Miranda. The current size of Central is about 53,000 sq metres.   

Central has been a centre of dispute in recent years with co-owners APPF and Westfield fighting for control, including legal action and counter-bids to buy each other out That was resolved in October with Westfield selling out its 50% stake to APPF, managed by Lend Lease, and Cairns Central is no longer included in the Westfield accounts.

Hillbilly has suggested Westfield may still have a finger in the pie, and given the $261 million paid was 16% above book value perhaps the deal also came with a free expansion plan from Westfield and a set of steak knives from Frank Lowy?  Westfield do provide some data for their shopping centre portfolio in handy excel format with some details for Cairns Central posted below:

Westfield bought well in 2006 and have exited with a decent profit. The yield can also be referred to as the capitalisation rate, used to derive the valuation: Valuation = Net Income/Cap Rate. Cap rates for the commercial property sector expanded following the GFC as can be seen here with Central. The impact of the regional economy on performance of the centre is also clear with both total sales and speciality store sales per square metre in decline sinice 2008.

Curiously there are different media reports that Lend Lease claim to have bought the stake at a 6% yield, while Westfield said they sold it at 5.2%. The latter is certainly consistent with Westfields spreadsheet data and the premium to book value. As a comparison the only properties valued on a cap rate near that low in the current Westfield portfolio are Sydney CBD and the massive Bondi Junction centre in the affluent eastern suburbs. Both those centres have substantially higher specialty sales per square metre.

Veteran financial commentator Terry McCrann has posted at the weekend on the retail sector crisis and queried the sustainability of the shopping centre business model:
Yes, as Westfield and GPT showed, as the property owner, you can continue to get rentals rising at a faster pace than are the sales of the actual shops. As a consequence of the annual, usually CPI-related rental resets. But that is only sustainable for a short period.
The 'full' price paid by APPF Lend Lease appears difficult to justify without further development of Cairns Central and a rebound in the regional economy, unless wholesale investors in the APPF fund are prepared to accept the lower returns indicated by the yield. If nothing else there doesn't appear to be any pessimism from shopping centre owners about the outlook for the local economy!

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