The shopping centre businesses of Scentre Group (ASX: SCG), Westfield Corp Ltd (ASX: WFD) and Vicinity Centres Re Ltd (ASX: VCX) used to have everything going for them.
Shopping centres were the best place to get anything you need under one roof. Retail sales were growing for most of the tenants. Property values were rapidly increasing, making the centres more valuable.
However, things aren't looking so good for shopping centres any more. In its quarterly update for the 12 months to 30 September 2017 Scentre Group reported that sales per square metre decreased for department stores, discount department stores, cinemas, leisure and homewares by 4.4%, 2.2%, 8.7%, 1.8% and 2.4% respectively.
Here are three other reasons why shopping centres are in trouble:
Internet shopping
For some shoppers it's a hassle getting to a shopping centre. The growth of internet shopping is great for consumers, it allows them to browse and buy in the comfort of their own home.
Greencross Limited's (ASX: GXL) Petbarn, JB Hi-Fi Limited (ASX: JBH) and many more are heavily growing their online sales. Whilst that's good for the selling business, it means sales are being taken away from the shopping centres, which is a large part of their rent growth.
Shoppers were limited to their local shopping centres before, now they have the whole internet they can use. Amazon hasn't even started yet and online shopping is already making its presence felt.
Home Consortium
Online shopping isn't the only competition for shopping centres owned by Vicinity and Scentre Group.
Woolworths Limited (ASX: WOW) made the fateful decision to close Masters a while ago. All of those buildings haven't been left to rot, a few of them have been turned into Bunnings warehouses by Wesfarmers Ltd (ASX: WES).
However, around 60 of the former Masters sites have been acquired by an organisation called Home Consortium. This group have spent around $1 billion to transform those buildings into warehouse shopping centres.
JB Hi-Fi, Nick Scali Limited (ASX: NCK), Coles, Woolworths, Chemist Warehouse and many more will all become tenants of the refurbished Masters locations.
The kicker is that the rental cost per square metre is around $200, compared to $600 per square metre for an average shopping centre.
Interest rates
The final large problem for the shopping centres is interest rates. This could cause a double whammy in the future.
Interest charges are normally a real estate investment trust's (REIT) largest expense. If a REIT has an effective interest rate of 4% then a 2% rate rise could effectively add about half of the interest expense on top of the already large figure.
Interest rate raises also cause investors to value assets at a lower multiple of their earnings. This could mean shopping centre earnings are lowered and investors value those earnings at a lower multiple.
Foolish takeaway
Vicinity, Westfield and Scentre Group are all good businesses, but I have outlined several headwinds that cause problems in the future ahead. I would avoid all of them at the current prices, I'm not sure I would ever buy them unless they can transform to cope with the new age of shopping.
