Background

Discuss about the Commercial property the Castle Towers in Castle Hill.

The Castle Towers shopping center in the sub region of Castle Hill in north Sydney is one of the biggest shopping centers in the country. In the midst of an expansion, this shopping center has a turn over of millions of dollars per day. In a world where commercial shopping centers are struggling to make spaces worth the rent, the Sydney market is increasingly showing growth in terms of rental prices. This report contains an economic evaluation of one such commercial property the Castle Towers in Castle Hill.

Compared to global giants, Sydney has a relatively small office stock, a measure to understand the supply of office. In the year 2016, the prime yields of the commercial real estate space were slightly over 5%, thank to the high liquidity cycle that has been maintained in Australia, since 2010. Sydney, as a market, is attractive to businesses thanks to a relatively high degree of economic freedom in the city as well as the availability of talent pool. (Cushman and Wakefield Capital Markets). The city has a talent pool of educated, English speaking young population. This adds to the attractiveness of the job market, which is inherently linked to retail spending.

In addition to this, Australia is generally supportive of Free trade Agreements and general business. As Australia’s trade ties grow stronger, Sydney as a market stands to gain, being one of the topmost commercial cities of the country. (Cushman and Wakefield Capital Markets)

Cromwell Funds Management, (2017) has expected the vacancy space in commerical spaces in Syndney to remain at less than 5%, while the growth of new stock of real estate property keeps declining.  The direct result of the increasing business, is the availability of a working professional population. The deep pockets, combined with the low interest rates that make easy credit available for spending, will hopefully  trigger a boom in retail and leisure spending. (Cromwell Property Group, 2018)

The average expected yield in the sub regional retail sector was 6.03% in the first quarter of 2017 and is estimated to be at 6.13% during the corresponding period in 2018. (Colliers International, 2017) 

The average Gross Face rents in New South Wales are expected to rise from $1355 to $1381 and the retail vacancy stood at 4.10%. this is lower than the full occupancy rate. If the population of sydney grows further and the demand for retail commercial space increases, the prices of the commercial market are expected to be inflated even further. New South Wales experienced a population growth of 1.61% in 2016-2017 and there is a good chance that Sydney might benefit to a great extent from this population growth. (Colliers International, 2017)  In a siutation where such rapid growth is expected, Commercial Property Managers must seek to have shorter leases  or seek to have leases where there is a default increase in rent by 4% at the end of the year.

Supply and demand of retail space in Sydney

While it is expected that the yields on the retail spaces in Australia to compress, the volume of exchanges is expected to remain, making the retail space a viable solution. (Facility Management, 2017)

In 2017, the national retail sales had grown by 40% as compared to the pre Global Financial Levels. This could have been a result of the easy availability of credit owing to the low interest rate policy that the Reserve Bank of Australia has maintained since the Global Financial Crisis.  A large part of that spending has been on relatively discretionary items like food, apparel and hospitality sectors. (Colliers International, 2017) 

Among the mix of the rental spaces, the contribution of Food and Beverage Industry and entertainment is increasing. This trend is maintained in the regional sub centers. Hence, it would make sense for sub centers to seek out Food and Beverage companies and increase their contribution in the rent mix.

The Castle Towers are located in the Castile Hill Property in Sydney. The sub regional property has approximately 114,000 square meters (GLA Retail) of floor space. Owned by Queensland Investment Corporation, it has a total available 5300 parking spaces.  The Castle Towers is a major retail hub with access to plenty of residential areas. Located in the booming area of North West Sydney, the Towers offer space for shopping, dining, entertainment and other commercial purposes.  Over 300 specialty retailers operate in the Castle Hill Towers. These include retail services of every kind, right from clothing brands to restaurant chains to skin clinics. The retail mix of the Castle Towers is well balanced with general super stores such as Kmart and specialty stores such as wellness clinics.

Accessibility and the public infrastructure surrounding the mall are important from the point of view of increasing the footfall at the mall. As the property is attached to a larger development project of Castle Hill, it is accessible to a host of residential projects in the surrounding areas, making it a very attractive investment. The property is surrounded by a number of establishments that could a source of customers. These include the Western Australia University of Pamaratta. The property is roughly 33 minutes of a drive by car from the Central Business District and is surrounded by a host of residential projects other than Castle Hill. The property already enjoys great accessibility by the road network with easy access to buses.   (Cushman and Wakefield Capital Markets)

Attractiveness of the Castle Towers Shopping Center

Prior to the Global Financial Crisis, the property was set for an expansion. However, as the Global Financial Crisis hit the country, expansion of the property much like many other properties. (Besser, 2007) The Global Financial Crisis of 2007-2008 had a significant impact on the global, Australian as well as the Sydney property markets. The number of asset value write downs sky rocketed and banking and non-banking financial funding hit new lows. Credit policies of banks were oriented towards zero risk and several non-banking financial firms and institutional foreign firms exited the market. (Ellis & Naughtin, 2010)

The Australian banking system, regulated by the Australian Prudential Regulatory Authority was somewhat less competitive and more conservative than some other advanced economies like USA, which insulated the financial system in Australia from the negative impacts of the financial crisis to some extent. The exposure to subprime assets was lower. Yet, the contagion of the Global Financial crisis affected Australia because lender repatriated funds to their home country, leading to a liquidity crisis in Australia. As a result, the financial positions of several banks were eroded due losses incurred owing to asset write-offs and write-downs. (Ellis & Naughtin, 2010) Australian banks relied heavily on international funding. The liquidity crisis caused by the financial crisis made borrowing funds and gaining investors from the international markets more expensive. (Jones Lang LaSalle, 2012)

Real Estate projects, typically, require a higher scale of funding and tend to be riskier than housing funding. With real estate development finance competing with other property markets such as housing or even other areas of lending, the funds for commercial development finance dried up from every source.

In Queensland, for example, there were approximately 44 firms that provided credit for development finance. This number shrunk to six, following the Global Financial Crisis. As the debt markets closed, fearing a freefall in asset prices, the Australian Government proposed the Australian Business Investment Plan.  For this plan, the  Australian Government, partnered with the Big Four banks in Australia for  $4 billion worth of  debt refinancing, in order to prevents further wrote offs and write downs. However, the capital markets were tentatively re-opened and the plan was rejected.  In spite of the re-opening of capital market, funding remained scarce in the absence of the capital market, given that plenty of sources had exited the market. (Housing supply in Australia : the impact of the availability of development finance , 2010) The exit of sources founding ensured that the capital scarcity for commercial property market continued beyond the crisis.

Impact of the Global Financial Crisis on the commercial property market in Australia

At the time, the withdrawal of funding left a deficit in the availibility development finance in the market. Another impact of this crisis was the exit of mortgage funds in the market, leaving the commercial real estate market to be crowded by banks. In case of banks, various sources of demand compete for funding such as business loans, housing loan etc. as opposed to mortgage loans that are specifically meant for mortgage lending. In 2010, banks were still reducing their exposure to commercial real estate funding. Thus, many real estate developers were struggling to obtain funds. (Jones Lang LaSalle, 2012)

This situation has changed in the recent times, as there has been a boom in investment in commercial property in Sydney, given the availability of liquidity. (Cushman and Wakefield Capital Markets)

The economy of Australia will shape the conditions of demand and supply of retail space within the country. Low lending rates would encourage investment in the commercial space sector while high GDP forecast will ensure that consumption will remain high, thereby, increasing the demand for retail space.

The lending rates of the Reserve Bank of Australia have declined continuously since 1990 and have hit an all time low in 2016. This makes investment in the property more attractive due the availability of cheap credit.

Australian wage rates have been stagnant as the rate of growth has continuously slowed since 2007. Despite this, retail has seen an increase in consumption. Some if this could be accorded to the increase in population while a part of the increase may be due to the fact that inflation rates in Australia have remained remarkably low following the Global Financial Crisis, which has led to an availability of cheap credit for the consumers to spend on. However, if the wages remain further stagnant, then retail consumption may slow down. However, forecasts for the future expect the domestic consumption to remain high, especially since the Australian economy is expected to grow at 3%.  A proposed rise in the minimum wage under the Fair Wages Act will further boost the domestic spending (Reserve Bank of Australia, 2017)

The Castle Towers project, therefore started the process of expansion in 2015, given the changed outlook and the easy availability of funds.

The expansion will increase the total floor space to 193, 458 square metres. A  total of 7959 car park spaces will be provided and additional space for motorcycles and bicycles. The development will make it possible to link the property to the Castle Hill Railway Station increasing the accessibility of the property. The under works completely automated rapid rail system Au $8.3 billion North West Rail Link is also, expected to increase the accessibility of the region. It is expected to be Australia’s largest mass transit infrastructure project and a priority project announced by the New South Wales Government. It will be the first fully-automated rapid transit rail system in Australia. The project will include a 23km railway link Cudgegong Road at Rouse Hill to Epping. The project includes eight new train stations along the line, including the Castle Hill Station. This will increase the accessibility of Castle Hill station with respect to the surround residential areas. (Colliers International, 2018)

Current state of the commercial property market and availability of development finance

It is expected that there will be competition from online markets. However, the growth rates in the rentals of malls suggest otherwise. The outlook still remains positive for shopping centers, although data suggests that shopping centers that focus more on dining, hospitality and leisure activities like gaming would expect to fare better.

There are plenty of other shopping centers that are cropping up in the periphery of the mall. Plenty of these are backed by capital investors with deep pockets:

The Home Hub Castle Hill is an example of such a competition. The mall has similar facilities to the Castle Towers and is likely to take away from the customers at Castle Towers.

There is still rising liquidity and low interest rates. Hence, liquidity crunch is not expected soon. Retail spending is Sydney is expected to be strong, especially is the given region of Castle Towers. Australia has, a after a long time, witnessed a GDP forecast of approximately 3%. Some of this GDP growth is expected to have returns for the real estate sector. (Cromwell Funds Management, 2017) The hub has a floor space of over 10,000square meters and 1213 car parks. Although it is a much smaller estate, the mall is competitive and sees plenty of foot fall.

The Castle Towers is surrounded by residential areas and its main customers are expected to be working professional and some university students. The availability of a professional talent pool with high spending powers in the vicinity, ensures that Castle Towers are in fact, a viable commercial property and will remain so. Apparently, the negative effects of the global financial crisis are left in the past and the market for retail is picking up once again. (Cushman and Wakefield Capital Markets) The expansion of the Castle Towers may not only help it achieve better economies of scale but also,  possible, help increase it’s accessibility. The Reserve Bank of Australia has had a target inflation of around 2% , and this may keep bond yields low. If inflation remains low, consumer spending would be expected to remain high. Additionally,  a rise in the minimum wage may help in the retail turn over at the mall due to increased spending. Low bond yields will ensure the availability of cheap credit which in turn could boost investment in retail space such as the Castle Towers. The Sydney market is saturated in the Central Business district and the stock of properties of investment is not great. However, capital markets are only investing in properties that have quality. Sydney being a commercial and tourism hub , is expected to lose less value as compared to tier II and tier III cities,  in case the retail property market experiences a down turn. This “Flight to Quality” is diverting funds to the Sydney market which may further lead to a rise in the returns on investment in expansion. (Knight Frank LLP, 2017)

Conclusion

The outlook for the Castle Towers is positive. However, commercial property manager must focus on maximizing profitability by choosing the right tenant mix. The property can also, add to this mix by allowing office spaces. The Sydney Central Business District is losing stock and it is possible that firms may be looking for office spaces in the suburban and sub regional areas where rents are low.

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