Paved Paradise and Put Up an Apartment Block

They paved paradise, and put up a parking lot.

That’s a lyric from Joni Mitchell’s Big Yellow Taxi. The song was a little ditty about the bulldozing of bush land to make way for commercial development.

In spite of how the younger generation wants to remember it, the song wasn’t a number-one hit when it was released in 1970. It’s only as the years have gone by that the song has become synonymous with capitalist progress.

It also turned out to be strongly prophetic for the decades ahead.

And now, with all the trees ripped out, and all the parking lots built, there’s only one place left to expand: up.

‘Air rights’ weren’t a thing in Australia until a few years ago. Even then, it mirrored the US, where air rights were mostly protecting the space around important buildings. There were high profile cases in the US, like Donald Trump buying the air rights to protect the views at his Trump World Tower.

Of course, things change. Now air rights mean something more than just views. Instead of paving paradise and putting a parking lot, the new twist is to rip up the parking lot and put in an apartment block.

Shopping centre owner and manager Vicinity Centres Re Ltd [ASX:VCX] is currently assessing the value of the land surrounding some of their 80 shopping centres.

Six weeks into the job, Vicinity’s new chief executive Grant Kelley reckons there’s no point in having land sit idly around shopping centres when, in his view, it could be more productive.

Kelley noted yesterday:

It’s clear that Vicinity has an opportunity-rich real estate portfolio. We’re working through the precise nature of the mixed use opportunity and we’re actually doing detailed value generation analysis of all 75 assets in the portfolio.

With a material amount of land surrounding many of our shopping centres, I think there is a clear potential to unlock and optimise significant unrealised value in the portfolio.

The decision to start estimating the value of the land comes on the back of slowing retail conditions. As Kelley notes:

Subdued economic growth in Australia, in particular wages growth has underpinned a challenging retail environment. While there were signs of improving economic conditions in late 2017, this may take time to flow through to increased retail spending.

Vicinity’s bottom line recently took a hit, with profits down in the first half of 2018. The company reported a net profit of $755.9 million, down 16.8%, from $908.8 million, compared to the same period last year.

However, funds from operations were higher by 2.2%. This term is commonly used in the real estate industry to describe the cash flow of earnings.

Interestingly, Kelley has chosen to use the word ‘surrounding land’. Chances are the surrounding land is mostly car parks.

Realistically, it’s probably the air rights they’ll be keen to flog off.

Instead of protecting the view, it will be space above the shopping centre that’s up for sale.

It’s not the first time they’ve done this. They recently offered up the air rights above The Glen Shopping Centre in Victoria, selling off the rights to the Golden Age Group to develop 500 apartments for $30 million. Vicinity scored a $15 million share, as The Glen is a joint venture.

How successful the venture will be remains to be seen.

The retail airspace bonanza

Currently, shopping centres are testing how useful the airspace is above retail centres.

Privately owned by QIC Eastland Shopping Centre in Ringwood, Melbourne has recently done this. Spending a total of $1.2 billion on shopping centre development, the enormous centre now has a five-storey, 120-room hotel on top of it.

Did Ringwood need a 120-room hotel smack bang on top of a shopping centre? Most likely not.

Ringwood is 23 kilometres from Melbourne’s centre, and it’s pretty unremarkable. It’s not a trendy or funky suburb. There are no tourist attractions there. And it isn’t even a major business hub.

Then there is retail mecca Chadstone Shopping Centre, which is jointly owned by Vicinity and the Gandel Group. Chadstone began building its $130 million, 13-storey hotel right next to the 221,000-square-metre retail heaven.

Sure, Chadstone is fantastic for those that consider shopping as cardio, but the retail mecca is still just a giant collection of expensive shops in an unremarkable suburb.

Even though the owners of Eastland beat Chadstone to the punch, what happens at Chadstone generally sets the tone and direction for all shopping centres.

More importantly, the demand for hotels on top of shopping centres is about to be tested locally. Hotels right on top of major shopping centres are common in big international cities.

According to Cycles, Trends and Forecasts editor Phil Anderson, the building of apartments on top of shopping centres is timely. He says we are midway through a property boom. And it is during this time that developers are looking for anywhere to build sky-high towers. In fact, Phil would argue that developers willing to buy air rights is just another sign the property boom is yet to really take off.

When it turns out the airspace above malls is possibly worth more than the shops in the malls, it’s time to sell those air rights to the highest bidder.

Kind regards,

Shae Russell,
Editor, Markets & Money


Shae Russell started out in financial markets more than a decade ago. Working with a derivative brokering firm, she helped clients understand derivative markets, as well as teaching them the basics of technical analysis. Since joining Port Phillip Publishing eight years ago, Shae has worked across a number of publications. She holds the record for the highest-returning stock recommendation, in which a microcap stock returned over 1,200% in six months. Ask her about it, and she won’t stop yapping on. For the past two years, Shae has worked alongside Jim Rickards as his Australian analyst, translating global macro trends for Aussie investors, and how they can take advantage of these trends. Drawing on her extensive experience, Shae is the lead editor of Markets & Money. Each day, Shae looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.


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