Australia set to mimic US retail rebound as shoppers cut down on clicking

The rebound in bricks-and-mortar retail in the US could be on its way here as stir-crazy shoppers put down their iPads and make the most of their newfound freedoms, says Chris Bedingfield, principal and portfolio manager of Quay Global Investors.

"If you look at what's been happening in the United States, it's a bit of a window as to what we can expect here in Australia," he says.

Bricks-and-mortar retail sales are 16% higher there than they were before the pandemic, and shares in the nation's biggest shopping centre owner, Simon Property Group, have risen to match.

His team at Quay see value locally in Scentre Group, formerly Westfield, whose earnings are yet to bounce back.

"We can see the theme playing out overseas," Bedingfield says. "People aren't paying for it here. So we're taking advantage of it."

Bedingfield also gives a quick lesson in the application of macroeconomic thinking, and touches on the mega theme of ageing populations, spelling out why patience is a must for property investors.

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Quay, a Bennelong Funds Management  boutique, focuses on the preservation and creation of wealth through innovative strategies in real estate securities. For more insights on global property, visit Quay’s website.

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Edited transcript

How do you think the reopening will play out for retail?

It's really interesting because it's been very uneven around the world. If you look at the United States, which is about 12 months ahead of where we are here in Australia, because in Australia, we had that second lockdown, particularly in the east coast during June, July, August, September, whereas the US was pretty much open during that period.

If you look at what's been happening in the United States, it's a bit of a window as to what we can expect here in Australia.

And in the US, the largest shopping centre owner is a company called Simon Property Group. They just reported their third-quarter sales and earnings, and their third-quarter sales were higher than what they were in 2019. So people have come back to the shopping centre environment greater in 2021 than 2019.

That's just one company. If you look at the broader data, the US Bureau of Economic Analysis put out retail sales data every month. They put out online shopping data every quarter.

If you strip out the online retail sales from the total retail sales, you can sort of imply what's happening in bricks and mortar in the United States across the whole country.

And at the moment, bricks and mortar retail sales are 16% higher than they were in 2019. It seems clear to us that people are coming back to physical retail, physical shopping centres.

That's not to say online is going away. It's maybe just a reflection of people going a little bit stir crazy being locked down and wanting to be out. We'll see how that pans out going forward.

But I think there's interesting opportunities looking at the US, which is to be a little bit more advanced in that whole reopening than other economies. And we're trying to take advantage of some of those inconsistencies and discrepancies around the world.

Which stocks present opportunities as activity picks up in retail?

Our biggest holding in Australia is Scentre Group. Like Simon Property Group, Scentre Group is the largest shopping centre landlord in Australia. It's the old Westfield brand, as most people would recognise that name.

If you look at where the share price is today for Scentre Group, it's around $3 a share. Prior to the pandemic, it was roughly $4 a share. So it's still well below its pre-pandemic price.

Simon Property Group, a company we mentioned a moment ago, was trading at $160 a share. Prior to the pandemic, it was about $140. So Simon's already gotten well past where it was pre-pandemic for all of the reasons I just mentioned.

Their sales have bounced back quite nicely. Their earnings are coming back quite nicely. They've just upgraded their earnings roughly 10% for the last quarter, but that hasn't happened for the Scentre Group in Australia.

So we see that sort of inconsistency where going ahead 12 months, fingers crossed, if we don't go through another lockdown, we're going to see that same sort of bump here in Australia. And people just aren't paying for it at the moment for Scentre Group. And so we are taking advantage of it.

The other thing I'd say about Scentre is there's been some concern in the marketplace about the valuation of shopping centres given the online threat, given what's happened with COVID, but we've just seen some direct market transaction activity that indicates that very good high quality shopping centres are still trading on very low yields, which supports Scentre Group's book value, which is roughly $3.60 a share. As I said, the stock price about $3 a share.

So you're buying it below book. We know the direct market is paying the book value. And Scentre Group, on top of its book value, has a lot of external funds under management, which is not in their book value.

So it justifies an even higher price. So deep value. We can see the theme playing out overseas. People aren't paying for it here. So we're taking advantage of it.

What global macroeconomic themes do you see affecting property markets in the long term and how are you responding?

When we think of short-term in real estate, we think the next three to four years. Real estate is a slow-moving asset class.

In the short-term, the big theme is that households have a lot of savings because governments have run big deficits. And when governments run big deficits, the non-government sector accumulates the surplus. It's just the simple laws of accounting.

The scale of these deficits is what I think is going to catch a lot of people by surprise. So in the United States, for instance, household savings to GDP was running at around 5% per annum. With the stimulus, it has been running at 15, 16, 20%. So there's been a big surge in household savings.

We've seen a recapitalisation of household balance sheets that we haven't seen really since the Second World War when you have big deficits for fighting the Second World War.

And if you look back at that time, that really set up the middle class in countries like Australia and Europe and particularly the United States. It really set up the middle class for the next 10, 15 years of economic growth and prosperity.

I don't think it's a stretch to suggest that could actually happen again this time because of the level of savings that has been generated through government deficits.

I think governments have also, and more importantly, the citizens of governments also now recognise that countries like Australia and the United States and Britain, they've never been fiscally constrained.

This whole idea that governments were the same as households, that myth has now, I think, been shattered to some extent. The argument that we can't afford to do this or we can't afford to do that is no longer relevant. The issue now is inflation.

So I think that's the next three, four years. But looking beyond that, the mega theme is the ageing population.

And in real estate, you can play that a number of different ways, but senior housing or aged care or manufactured housing are great ways to play that ageing population, because that's the macroeconomics. That's the easiest to predict.

We don't have to worry about US Federal Reserve chair Jerome Powell. We don't have to worry about who the president is or who the prime minister is. We don't have to worry about quantitative easing.

Every day people are getting older. In the United States, 10,000 Americans are turning 65 every day. And that's going to keep happening until the year 2030.

Now, those people, as they're getting older, they're becoming empty-nesters. They're retiring. And they need different accommodation needs than what they had in the past. And that lends itself into areas such as manufactured housing and senior housing.

That's the big theme. You have to be patient. You have to look beyond the next three, four years, five years. That's what we do. And that's one of the big themes.