The construction pipeline for commercial property in South-east Queensland has been strong in recent times. This is particularly apparent in the retail sector with the expansion of regional shopping centres contributing a significant amount of the total supply. Figure 1 shows the high level of construction either completed or in the pipeline for regional shopping centres between 2014 and 2018 in South-east Queensland. In that period, the total net leasable area of regional centres is expected to increase by 22.7% whilst population growth for the region is expected to only increase by 8.1% (ABS, 2016). The rise in construction activity is also occurring Australia wide with the supply of regional shopping centre space expected to be well above the long term average in 2016 and 2017.

Figure 1: Regional Shopping Centre construction in South-east QueenslandSource: JLL Research

Part of the motivation behind this increased construction activity is that regional shopping centres are a tightly held asset class and therefore existing owners are choosing to expand existing centres as they are unable to acquire. To validate the low liquidity of this asset class, the last transaction of regional shopping centres in South-east Queensland was back in early 2013, when QIC purchased the remaining 50% stake in the Logan Hyperdome. Only two other transactions have occurred since 2007.

Another reason for the recent increase in construction is to improve owners/shareholder returns. Scentre Group, who are currently expanding Westfield North Lakes (with DEXUS) and Westfield Chermside, are estimating that their development pipeline in Australia will generate internal rates of return (IRR) of more than 15%. Conversely the acquisition of a regional shopping centre would likely have an IRR of around 7.5-8%.

The low vacancy of regional shopping centres is also a significant driver of existing owners’ willingness to commit to these expansions. As of 2Q16, regional centre vacancy is at 2.8% in South-east Queensland, compared with sub-regional of 3.2% and CBD at 8.9%. Therefore these owners are looking to increase their exposure to regional shopping centres as they are a lower risk asset class.

Redevelopments of these centres have increasingly sought to improve the overall shopping experience and encourage longer visits. Part of this has been the increase in food, beverage and entertainment offerings to ensure that centres are seen as more of a destination. An example of a recent construction project is the major redevelopment of Pacific Fair at the Gold Coast. The expansion (42,700 sqm) was commenced in early 2014 and will complete in 3Q16 at an estimated cost of $670 million. Part of the redevelopment has included a new restaurant precinct called “The Patio” which includes a range of options that allow for a sit-down dining experience rather than the traditional food court style. Once complete, Pacific Fair will be the largest shopping centre in Queensland and the fourth largest in Australia.

Eight of the twelve regional shopping centres in South-east Queensland are either undergoing or recently have completed expansion projects. Therefore, it is likely that construction in this sub-sector will ease beyond 2018.

Figure 2: Regional Shopping Centres in South-east QueenslandSource: JLL Research

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