Episode 7 – The retail perspective

Disclaimer: The information contained in this podcast is general information only and opinions of participants are their own and not the views of their organisations. Any advice is general advice only. Past performance should not be relied on as indicative of future performance.

Intro: Welcome to The REAL Deal, a monthly podcast about what’s happening across the real estate and infrastructure sectors.

Episode grab (Marco): We know with retail – one size doesn't fit all. We know every trade area is very diverse and there's a different set of supply and demand drivers that exist. So as a Dexus investment manager we can say, right, we think [residential] works best in this location and we're able to apply that expertise and deliver it. In another, it may be health, in another it may be education, it may be student accommodation, or it could be a combination of each. But that is the skill going forward, to be able to optimize these assets and get the best investment return out of them.

Intro (cont.): That was Marco Ettorre, Dexus Executive General Manager for Retail who joined Darren Steinberg to breakdown the shopping centre resurgence and explore how post-COVID, retail is transforming itself to meet a new set of customer demands.

Darren Steinberg: Welcome everyone to The REAL Deal podcast. Today we are joined by Dexus’s Executive General Manager of Retail, Marco Ettorre. Welcome Marco, and thanks for joining us today.

Marco Ettorre: Thanks, Darren. Looking forward to it.

Darren Steinberg: So, Marco, you've had a long career in the retail sector and a depth of experience. Let's start by telling our listeners a little bit about yourself.

Marco Ettorre: [00:00:20] Yes, so I did a Bachelor of Commerce. I loved marketing and so when I came out of university in the first job I got was this assistant marketing manager at Macarthur Square. From there, my love of marketing changed into this love of retail and retail shopping centres. To me, it was so interesting to be part of that shopping centre management team, it was fast paced, it was a dynamic environment and so I got hooked. 25 years later I worked my way through many roles in the shopping centre business, you know, centre management, leasing, I did marketing, operations, development, even had a stint in funds. And to be honest with you, it's just been a fantastic ride. I think for me, the most pleasurable thing was working on things like developments, you know, greenfield or expansions of major shopping centres and acquisitions and disposal of assets and so it was just a love affair that grew. And, you know, 25 years later here at Dexus sort of running the retail business has been fantastic. It's been a good ride.

Darren Steinberg: [00:01:25] Look, it's a great industry. You followed a very similar path to myself. I mean it's just such an exciting and dynamic sector. There's always something happening and there's always a new retailer coming up and they're assets that you can really use your skills to add value to and drive income. Office is a slower moving beast versus retail where you really can turn the dial quite quickly. Marco, let's go back 25 years to when you first started out in retail, just how the sector has evolved, the technology and how we're a bit more data driven today, than in the old days, we used to sort of get out our rolodex and make up tenancy mix. Why don't you just elaborate a little bit more about how those changes have taken place?

Marco Ettorre: [00:02:07] It's interesting, in 25 years, the function of running a shopping centre hasn't changed. Really the best practice management protocols are about delivering consistency on convenience, on cleanliness, on safety, making sure centres are presented well, amenities, toilets, seating pods, things that a customer comes to expect from a shopping centre. It's about delivering that best in practice, in an environment that customers will enjoy shopping and being able to do that day in, day out. I think that hasn't changed. What has changed is the context of a shopping centre. If you think about the retail mix, back many years ago, it was all about core shopping. It was this 9 to 5.30 type of precinct where people came to basically do their fashion shop. There was a bit of fresh food. What's happened is centres have evolved, the body clock of centres have changed, we've now got precincts that trade prior to 9 a.m. – we've got childcare centres, we've got gyms. We've gone through the evolution of the fresh food precinct where we've had large independent supermarkets like Harris Farm that provide this fresh food market that we've tried to build within our shopping centres. And then if you think about the night economy, we now have these entertainment and lifestyle precincts that we're really driving casual dining and cinema visitation and entertainment later at night. So what is interesting has been, how do we as shopping centre managers understand that retail mix, understand what customers want. So we look at how we make decisions and how we get those data points, and it really is about research. Back in the day, we'd walk around with a clipboard and we'd ask customers, who do you want to see in the shopping centre, and why do you come here? Now we're a lot more sophisticated. We have Wi-Fi and mobile phone tracking. So we're able to heatmap our shopping centres and understand what parts of the retail precincts work don't work. What times of the day is our car park at peak visitation? How do people walk and flow through our shopping centres? We use credit  card data a lot now to understand the buying behaviour of customers. What are people coming to the shopping centre for? What are they not coming to the shopping centre [for]? Where are they spending money, outside our trade area or in other precincts? So we can understand what it is the customer really wants so we can try to deliver that.

Darren Steinberg: It makes it a lot easier. I remember retail leasing wise, I mean, I saw some of that credit card data a couple of years ago. And the fact that you can say, oh, there's a shortage of people buying jeans in this trade area. Therefore, you know, you need a jeanery or you know there's someone that needs more female suiting for office workers and that they're buying it, but they're not buying it in this specific centre. So it really does make the leasing job a hell of a lot easier that specific data, it's quite incredible.

Marco Ettorre: Absolutely. So what you're able to do is make those pivots and actually speak to retailers about that data. Retailers use credit card data as well. But what is interesting is you're able, as a leasing team, to actually sell the merits of a centre, because you're able to demonstrate that there's a demand for that service or that type of product in your shopping centre. And so you're able to really get to the pointy end of retail mixing and have those conversations with retailers. You know, when you look at benchmarking and how your centre performs, it's all about being able to make these changes as quickly as possible and being able to pivot. And so, the credit card data really gets you to be able to sit down with the team and actually make these changes in real time, rather than waiting an extended period of time to be able to introduce some of these key retail mix changes.

Darren Steinberg: So you're running or overseeing about $10 billion of retail right across the country, from West Australia to North Queensland, down to Victoria. As you said before, we've both been through many cycles. So maybe you can just elaborate a little bit on what you're seeing on the ground today with regard to retail sales, first of all. And then we might talk about the kind of trends you're seeing in the shopping centres. So let's start with retail sales. From a shopping centre perspective, sales still look pretty good. However, the ABS data was out yesterday, and it says that retail spending really has come off quite strongly, as anticipated with all the interest rate rises. Can I get your view on that?

Marco Ettorre: I think what we have seen within our portfolio is the data, particularly in the last couple of months, was the strongest November period we've had in history. So for us, the Cyber Monday, the Black Friday sales were the were the biggest that we'd seen through our portfolio. We saw for November 6% sales growth versus an ABS number of about 2%. So it was very positive, very strong. We thought going into December then we'd see some weakness. But again, our December sales numbers are up about 4%. And what's actually more interesting is we're seeing really strong traffic growth over those two months. So we're seeing double digit growth on 2022. And we're seeing, you know, growth on our 2019 numbers, which were pre-pandemic.

Darren Steinberg: So what do you think is driving that? Obviously the online retail was a big buzz that's going on around the globe. We've seen it impact retail for many years now, but at the same time we're getting this double-digit growth in shopping centre visitation. So what do you think is the key driver there?

Marco Ettorre: [00:07:34] You know, pre-COVID the thing that was top of mind around shopping centres was – online is here, the physical bricks and mortar retail is dead. You know, you go to every investor presentation pre-COVID and it was basically in five years time the globe wouldn't have shopping centres, ghost malls and retail's overdone. And what we found through COVID, and as COVD basically dissipated, was people flooded back to shopping centres. People wanted that social interaction, people wanted to shop. And what we found was shopping centre provided a precinct where you could go to, you could conveniently get in, but effectively it gave you an ability to shop the physical bricks and mortar, but in a social setting. And so I think online is there and online is part of that omnichannel approach that a lot of retailers have in place now. And what we're seeing is the growth in online is predominantly by bricks and mortar retailers who are growing their online presence. But, you know, the growth that we are seeing is the fact that people recognize that they want to shop, they want to shop from a bricks and mortar perspective, and shopping centres are providing that environment. I think the other thing is the mix of a shopping centre now is not just core retail. You know, we've spoken before about the evolution – things like entertainment precincts, casual dining, restaurants, gyms, childcare, medical services, health and wellbeing type usages. It's giving customers another reason to come back. So you're not just going there to do either your fresh food shop or your fashion shop. You're coming to a shopping centre 2 or 3 times a week to go to the bank or to go to the gym. And so you're driving visitation and greater footfall is having a positive influence on the sales we're seeing for our retailers that are there.

Darren Steinberg: So sales are healthy, occupancy costs have come down. So you as an operator of shopping centres, that's going to give you an ability to drive good income growth. So let's just talk about the investment angle here for a minute. Shopping centre yields they got very low when interest rates were low, interest rates are normalizing, I see yields on shopping centres have sort of come back into the five to six percent now. So your ability to drive income growth of that magnitude, you're comfortable you'll be able to deliver five to six percent income growth through the assets that we're managing?

Marco Ettorre: I think some of the positives that COVID provided the retail industry was there was a reset both in valuation and rents. So we had historic costs in a lot of say our super regionals that sat at 20 plus [percent]. You know, those costs now are sitting at a more sustainable level – 16, 17, 18% – that obviously as a base, you know, already starts you in a very positive situation. Then you overlay on that the idea that you've got this really strong population growth, you know, one and a half plus percent type population growth coming into shopping centres. You overlay on top of that, we've got migration, I think to dexus.com 5 September this year was at 500,000 for the country. That is back to pre-pandemic levels. We've got international students now back. All of those dynamics are providing, I guess, growth to sales within shopping centre. And so what we're able to do off this lower, more sustainable base is look to grow rents in line to what sales will be able to deliver. I think the other interesting factor is if you go back 10, 15, 20 years ago, the game in shopping centres was very much take a centre, look to do a development, add a whole lot of additional retail space. If you look at the pipeline for development, if you look at the scarcity of land, if you look at the development costs, the construction costs, the feasibility of doing full blown large retail developments, what we'll see with growth in population is really the retail floor space on a per capita basis actually comes down in terms of the reports I've read over the next ten years. So if you've got lower supply of retail space, you've got increasing population growth, you've got these dominant centres that are going to grow sales, then that has to be a positive in terms of being able to drive rents and obviously from an investment thesis perspective, they are all positive tailwinds going forward.

Darren Steinberg: I think you've hit the nail on the head there. You've got limited supply, limited new supply coming on. Australia's population has gone to 27 million now. And that additional sort of let's say there was 300,000-400,000 of migration plus the students coming in. That all leads to big positives for retail shopping centres. And in fact, we'll explain a little bit about why the online growth hasn't really impacted the shopping centre sales that you spoke about before. So all that's really positive. Total return from the assets you're running are you looking for sort of six to eight, seven to eight [percent]. What kind of total return are you looking for the assets that you are controlling?

Marco Ettorre: I mean again it comes down to the asset class. But if you're talking sort of those large dominant sort of super regional assets, you're probably looking at go forward returns in the sort of 7 to 8% type range again. And if you look at what drives that, very much it is around population growth and trade area growth, this limited supply and this ability to just grow rents in line with that. And so I think from a risk return basis a dominant regional has that as the underlying play. And then obviously on top of that, when we look at it strategically it is this opportunity potentially with a number of the assets that are on great transport links, have land, have opportunity to look at some other ways to actually enhance that return. And when we look at things like mixed use and the opportunity there, I think those returns can be enhanced when we strategically apply what we think we can as an investment manager to those assets and sort of add that diversification all these other usages to it that can actually add to that investment return.

Darren Steinberg: Yes these assets are in very strategic locations, particularly with regard to transport links and the basically inbuilt population that we have. So what opportunities do you see for managers of real asset platforms such as Dexus as opposed to pure play retail managers? You alluded before about mixed use. Do you want to just talk a little bit about that?

Marco Ettorre: Years ago it was basically just add another 100 shops and let's do a development. That's not the optimal way now to think about it. It's about mixed use. There's an opportunity to put residential on these assets or next to these assets which have a residential play in terms of return, but then there's this one plus one. You've got a whole lot of residents that sit on your doorstep that obviously come in to do their fresh food shopping, they come in to go and visit the banks and your gyms and go to dine and entertainment on the doorstep. You've got the opportunity to apply an office or a commercial lens to these assets where it sort of makes sense. Student accommodation for something like Macquarie, where you sit across the road from the university, that's an opportunity. And so Dexus particularly with North Shore Health Hub and the experience we've got there around sort of understanding that health care and the medical lens on these assets, I think where Dexus have an advantage is being able to think about each of these different asset classes have a very deep expertise in them and then understanding how do we apply them to a shopping centre type environment. And I think that's where as a pure play retail manager versus having this real asset experience, we're able to look to see what an asset can accommodate, what we think the trade area can support, and then we have the expertise in house to be able to try to work that into a development feasibility and actually build it and, and have it reside within that town centre for that trade area. And I think that's a real powerful proposition going forward for investors in these in these retail assets.

Darren Steinberg: Yes. Once again, it's about driving the maximum income out of a particular asset. And whether that asset is better positioned to be a retail plus [residential] or retail plus logistics or retail plus health, I think that's the skill of the best teams in this business are able to see the highest and best use for that property and drive outcomes.

Marco Ettorre: We know with retail, one size doesn't fit all. We know every trade area is very diverse. There's a different set of supply and demand drivers that exist. And so as a Dexus investment manager, we can say, right, we think [residential] works best in this location and we're able to apply that expertise and deliver it. In another it may be health, in another it may be education, it may be student accommodation, or it could be a combination of each. But that is the skill going forward, to be able to optimise these assets and get the best investment return out of them.

Darren Steinberg: Let's just change tack for a second. Obviously, Dexus is a very large owner of CBD property. We also have a very large CBD retail portfolio. Can you give us your insights on what you're seeing about the CBDs as they're coming back to life post COVID, more and more people coming back in, albeit people are working more flexibly, so it's not five days, seven days a week. Maybe you can just touch on what you're seeing in the CBDs and also what kind of retailers are interested in getting position in the CBD at the moment?

Marco Ettorre: What we have seen is from the depths of COVID where no one was coming in, we're seeing this return to work, which is driving an improved CBD retailing environment. Particularly for an asset like QV in Melbourne, where we sit close to the university, more students, more tourists that's driving sales. And the other thing too, is we found people shopped locally during COVID, so the CBD weekend trade really died off. Now on the weekends, people are coming back to the CBDs to shop. So I think all those things are improving year on year. And we're seeing it in our sales, in our traffic flows within the CBD precincts. The difference for us I guess, is again, it's quite bespoke around the assets that we have and the type of mix we want to have in these precincts. They're generally smaller, they're generally catering to a particular niche within that, but we are seeing more interest from luxe food and beverage operators. We have a number of assets, with the likes of Tiffany, Paspaley, we've recently put Valentino into 25 Martin Place, Dolce Gabbana. So luxe has been very strong in that CBD environment, and we've got a lot of interest there. And increasingly that is a way that we're playing it with some of the premium assets that we have in both Sydney and Melbourne. So thinking about the ground plane and what the people who are working in the office towers above and in the surrounding area want at the base of their buildings and creating an active ground plane with usages that will accommodate what people need. If you look at 25 Martin Place, we've looked at health there, we've got chemist, medical, so again, it's giving people their day to day needs.

Darren Steinberg: 25 Martin Place is a fantastic example of the skill base of the Dexus group. Because it was an older asset, we totally revitalized the ground floor plane. You guys have done an amazing job there with the restaurants, retail, and then as a result, the office tower got to 100% occupied on the back of that because of the amenity that was sitting around the base of that building and it's performing very, very strongly today. So once again, a very good example about the whole revitalization of CBDs on the back of the ground floor plane, and what's been fascinating is just the amount of retailers that are positioning and resetting themselves into the CBDs.

Marco Ettorre: And I would say not only 25 Martin Place, but also the work that Dexus did on King Street and that amalgamation, the run there now in terms of, Tiffany and IWC and a number of the other retailers.

Darren Steinberg: Louis Vuitton.

Marco Ettorre: Louis Vuitton at the end. It is a great example of that change in the CBD landscape and Dexus are the bookend of King Street with a mix that is conducive and trading very well.

Darren Steinberg: Well, Marco, it's been great to chat today. Thanks very much for joining us.

Marco Ettorre: My pleasure Darren, always enjoy having a chat about retail.

Darren Steinberg: Thanks everyone for listening. For our next episode, we'll be joined by incoming Dexus CEO Ross Du Vernet. And as usual, should you have any questions, please send them to therealdeal@dexus.com. Thanks everyone. Outro: You’ve been listening to The REAL Deal, a podcast for Dexus. Listen to The REAL Deal as dexus.com/theREALdeal and follow free on Apple podcasts, Google podcast, Spotify or wherever you listen to podcasts. This podcast is recorded on the lands of the Gadigal People of the Eora Nation.

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