High stakes in Stockland's shopping list

Stockland and Westfield are adopting opposing strategies to retail property – and the question of who is right will be a defining issue for the investment community.

Both Westfield and Stockland believe that there is money to be made by investing in new retail shopping centres. But Australia’s greatest retail family, the Lowys, are adopting an investment strategy that Stockland’s chief executive Matthew Quinn believes is very dangerous.

In the Stockland retail expansion Quinn is embracing a totally different investment strategy to Westfield. One of them is likely to be wrong and the outcome of this difference of opinion is one of the major issues in the Australian investment community.

In his KGB interview, Matthew Quinn is careful never to mention Westfield or the Lowy family, but in the Stockland investment presentation Quinn sets out a series of graphs that show that he does not agree with Westfield.

Westfield and most other major shopping centre investors love what are called ‘super regional centres’ – these centres are highly prized investments and are sold on very low yields. Quinn says that ‘super regional centres’ generate 46 per cent of their revenue from clothing and more than 90 per cent of that clothing is in the premium high-priced areas or in the mid-priced areas. These sectors are dangerous because that’s where online trading will gain most penetration.

By contrast, Quinn is investing in centres that gain only 29 per cent of their revenue from clothing, and more than half those clothing stores are ‘value’ stores, i.e. low priced. The internet penetration in these stores is miniscule. Moreover, Stockland centres have a much higher percentage of supermarkets and non-discretionary retailers.

So here are the graphs that show the basis of the Stockland strategy:

I tend to the view that Quinn is right but I have a great respect for the Lowy family and I am reluctant to call them wrong. However, it is interesting that they are selling equity in their shopping centres to local and overseas superannuation funds but retaining the management rights to give them the capital to development new centres.

If it works, Westfield will certainly gain a much higher return on capital. But if the Lowys are wrong the new centres will not be great performers.

Could both Quinn and the Lowys be right, and the Westfield centres be just so good that they will continue to attract big customer numbers? That is certainly what Westfield shareholders are banking on. But they should be aware that there is a serious difference of opinion within the retail property industry over which is the best way to go.

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