SCA PROPERTY GROUP: Engaging communities to achieve commercial reality

up has pulled it off, and according to them, have done it by focusing on the community… Take an ‘in-depth’ look at SCA Property Group and what you see is realism. There’s no ‘spin’ here. At SCA Property Group it’s simply about executing well on the basics; an adherence to the fundamentals of leasing shops to cater to the trade area population and focused, localised marketing to increase turnover and connect centres with their local communities in order to deliver the most convenient shopping. At SCA, there are no ‘Big Guns’, or major destinational components to their centres; it’s a portfolio of convenience that knows what it’s good at and provides a strong, and solid offer to customers and to a large degree, the centres are dominant in their trade areas. Blakes Crossing, SA (neighbourhood) 30km from Adelaide CBD SCA Property Group is the largest owner of Coles and Woolworths anchored neighbourhood centres in Australia; it is a specialist at ‘Convenience Shopping’ seeing this as its major point of difference in the world of retail property. And it’s delivering results; in its recently announced full year results, SCA Property Group was the best performing Retail A-REIT with a massive total shareholder return of 18.4%! Taking a step back into its history, some six years ago, when Woolworths was heavy in property ownership; at a time when analysts questioned the extent of property on the balance sheet of what was a retail business, the company spun out SCA Property Group, divesting a swag of real estate, mainly concentrated on the eastern seaboard of Australia. In the main they were neighbourhood centres; a few were sub-regionals; the common characteristic being that they were anchored by a supermarket and in some cases a DDS as well. Being a retailer, Woolworths designed many of these centres to cater for customers and provide retailers the best opportunity to succeed. Nonetheless, Woolworths’ core business remained supermarkets. The new REIT – Shopping Centres Australia Property Group – was set-up to be a true property company, a major owner of shopping centres, so obviously the focus switched from supermarket performance to asset performance. Woolford, QLD (neighbourhood) Anthony Mellowes, SCA’s new CEO, had spent more than a decade with Woolworths in its property division; Sid Sharma, (now SCA’s Chief Operating Officer), had previously been the National Leasing Manager. Prior to that, Sid had worked in Leasing with Dexus and had done a stint with Stockland. Others came across from the Woolworths’ camp and a few joined the new group from other retail property companies. It was a tightly knit team, small, lean and efficient. Experience in large centres run by the major shopping centre owners was a common characteristic of the team members. They set about using that experience to become specialists in convenience shopping. They had a stated mission to become the market leader in convenience shopping. It was, and still is, a fragmented sector of the market traditionally dominated by private investors with a very different management, marketing and operations to say those deployed in Big Gun centres. In fact, in the main, centre management was mostly about collecting rent, repairs and maintenance and the payment of bills. More often than not, there was no ‘on-site’ manager; the local real estate agent usually filled the bill. Cabarita, northern NSW (neighbourhood) The challenge for this new REIT was to provide sophisticated management to a portfolio of neighbourhood centres spread out over a massive geographical area. Most centres were too small to warrant a full-time manager, let alone a dedicated marketing executive; so how do you do it? It was a tremendous challenge yet it was obvious that if a solution could be found, the rewards were sizeable. If the turnovers of majors could be improved, and specialities received increased focus, there was significant upside. Specialties were trading well on a square metre basis but, overall, consistency in quality was lacking; specialty chains and national retailers were conspicuous by their absence, yet the potential for successful operations was obvious. Sid Sharma told SCN that the opportunity was clear from the get-go considering the centre asset quality (many new builds and shiny centres), the trade area demographics which equated to somewhat captive markets. “We were looking at some great numbers; MAT/m2 across the board – majors and specialties – was impressive; many centres were trading as good as, and sometimes better than their Big and Little Gun cousins. If we could provide sophisticated management, how much more could they do and if we introduced some strong performing chains, how much escape spending could we claw back?” Sharma said that further investigation at the local level revealed there was untapped expertise in the centre teams. “We found highly trained individuals – institutionally trained – who had track records in retail development, management and marketing; many having stayed in or returned to local areas where they had grown up instead of major cities.” The way forward was clear, says Sharma; to think nationally but act locally. After the first couple of years, the performance of the centres improved dramatically. New centres were acquired and the management structure and processes were refined. Two years ago, the total portfolio was divided up into 10 regions; there are 86 centres with the best property asset management providers in the country appointed. Knight Frank looks after Facilities Management for the entire portfolio; Management Expense procurements are controlled centrally. There is one central software system and the 10 regions plug into it, but not at the expense of local influence and decision-making. It’s very refreshing to talk to Mellowes and Sharma because you can feel the passion. It’s a passion derived from being close to the action on a daily basis. It’s something we’ve lost in the big centres, perhaps. As our industry has developed, the new ‘layers of management’, the newly introduced controlling interests and the subsequent requirement for complex reporting systems, have all conspired as it were, to take us further away from the basics – the shopper and their habits, the individual shop turnover, and the retailer’s ability to pay a certain percentage of it in rent. The attention to detail at SCA is phenomenal; especially when it comes to shopper profiles. Sid Sharma explains: “Our shopper travels 15 minutes to get to the centre. Predominantly, they’re women and spend 30 minutes at the centre and then take another 15 minutes to drive home – that’s 60% of our customers. Shopping with us two-and-a-half to three times a week, they use the supermarket and specialties as a pantry.” He continues, “Our customers park 50 metres from the supermarket and pass six shops on the way to reaching it. Once inside the supermarket, our customers walk every aisle (80% do) and usually have their children with them.” And most of all, their customers value convenience. The specialist butcher in a typical SCA centre, says Sharma, displays and sells a significant amount of ‘pre-prepared’ items – marinated cuts ready for quick and simple cooking, chicken dishes ready for the oven or placement straight into a casserole dish, cuts of various meats already seasoned and spiced. The typical butcher has an MAT in the vicinity of $1.25 million but he can do better than his counterpart in a larger centre as his rent is lower. The baker has an MAT of about $1.0 to $1.2 million and pays in the vicinity of 8% in occupancy costs; it’s more often than not a better deal than in the larger centres. This ‘grass roots’ approach, this ‘close to the action’ business model, generates a lot of satisfaction among the SCA executive and the local management at centre level. As noted earlier in this article, a significant component of the team has worked previously with larger organisations running larger centres; at SCA, according to Mellowes and Sharma, they gain a greater sense of achievement because decision-making is streamlined and implemented strategies pay dividends quickly. It’s not difficult to understand why. Think of a small centre – a Mini Gun – located in a small country town; a GLA of about 7,500m2; a supermarket and say 20 specialties. Previously it was ‘managed’ by the local real estate agent who collected the rent, checked on the locally outsourced cleaning crew and attended to the odd repairs and maintenance requirement by engaging local contractors. It’s not just possible but highly likely that this agent would be blissfully unaware of the trading statistics of the centre; totally unaware of the MAT/m2 figures for either the supermarket or the individual specialties. The strategy on vacancies would likely to have been passive rather than proactive; when one occurred, an advert for a new tenant placed in the local paper, a couple of phone calls perhaps but all in all, a ‘wait and see’ strategy with a $1,000 per week rent targeted. Highly unlikely that a specialty chain and/or a national operator would be contacted. Switch now to an SCA owned centre. It’s managed as part of a ‘regional portfolio’ by a highly experienced shopping centre manager with a long track record in one of the major shopping centre companies now based locally or in a nearby major town. This individual is acutely aware of the centre’s trading patterns, its strengths and weaknesses and, more to the point, the existing gaps in the tenant mix in relation to trade area demand. Based on this local and national understanding, a national chain retailer is targeted at an attractive occupancy cost. It’s an evolutionary process. The experts, the top professionals in our industry, prior to the early 1990s, were all solely engaged with the Big Gun companies. In the mid 1990s, some started to move to the Little Gun arena – at the time, Stockland led the way. The difference in yields between Little and Big Gun centres was significant, as much as two percentage points, sometimes even more. At that time, Little Gun centres were seen as riskier so the yields were higher. This sharpened focus produced a ‘double whammy’ in relation to yield and therefore value; the risk factor lessened, the rents rose and the capitalisation rate dropped. Similarly, this evolution is now well underway in the Mini Gun sector and with 86 centres, SCA is the largest and leading the way! The results speak for themselves. SCA has quietly and consistently outperformed its A-REIT peers and in the financial year to 2018, it was the best performing Retail A-REIT with a total shareholder return of 18.4%. In times of low growth and retail under pressure, the SCA portfolio is nothing short of phenomenal. In the 2018 year, major stores (supermarkets and DDSs) recorded sales growth of 2%. Specialties sales growth was 3.3% and across the portfolio, 123 lease renewals recorded an average rental increase of 6.1%. Specialty occupancy costs averaged 9.8% across the board. It’s not surprising that the specialty retention rate is running at a high of 82%. SCA’s total portfolio occupancy is 98.4% with specialty vacancy less than 5%. Stores are performing well with strong and higher than industry average sales growth. So, if you’d invested in SCA Property Group when it first floated some five years ago, you would have done rather well. Both in terms of dividend income and capital appreciation on the share value in excess of 66%! Pretty good for a low-risk, stable property company, investing in Woolworths and Coles Supermarket anchored, professionally managed, convenience-based shopping centres. Or in two words; ‘rather solid’! And one can’t leave the performance arena without looking at the future development pipeline. Currently, SCA has identified expansion/re-development potential in some 24 centres during the next five years with an estimated development cost in the vicinity of $125 million. A major development completed last year added specialties and a third anchor (Coles) to Kwinana near Perth. The project showed a 10% yield on cost. Kwinana Marketplace, WA (sub-regional) 35km south of Perth CBD SCA shows no sign of slowing its growth with a focus on strategic accretive acquisitions in key regional hubs. The past year saw SCA Property Group acquire three properties including Sugarworld Shopping Centre in Cairns; Shell Cove Town Centre, NSW; and just last month, Sturt Mall in Wagga Wagga NSW. SCA stresses that the success of the company, its ongoing expansion and future growth, are linked closely with its focus on the community and understanding the needs and demands of both the trade area population and the retailers within their centres. They’ve chosen management companies that can demonstrate local expertise and engagement with the community (see industry profile on CBRE). “It’s all about the people,” says Sharma, “but in a far more individual or ‘micro’ sense than in the larger centres. ” With SCA centres, the focus is hyper local; there’s no ‘one size fits all’ and their managers need to react to what’s going on in each centre’s locality. “I’m not into the ‘national benchmarks with five-year aggregated outdated averages, I’m in the primary catchment business today. The tertiary trade area is not important for our neighbourhood centres; but we do need our centres to really understand and cater for their circa 20,000 customers in the Primary area.” Fundamentally, it’s SCA’s approach that is refreshing; its take on certain forms of retail is interesting. For example, its focus on the importance on the link between social interaction, community and retail. It goes without saying that, overall, community as a value is stronger in regional areas than it is in the big city. For 50 years, says Sharma, we’ve been homogenising retail; 50 years of standardising it and getting rid of the personal touch; it’s been done at the expense of social interaction. In SCA’s world, he says, that’s what they are doing – promoting social interaction – it’s a well-defined management strategy and it’s paying off; they’re harnessing ‘community’ to commercial reality. The demographic statistics show the difference. Eighty per cent of their customers have no mortgage while more than 75% are not home-owners, indicating they are highly price conscious and value driven. Thirty-three per cent are ‘battlers’, mostly Aussie born, families, single mums and retirees focused on making ends meet. Sixteen per cent are ‘Golden Years’ – conservative, risk-averse retirees. Sixteen per cent are young families in the outer suburbs. The average ‘dwell time’ is just 20-30 minutes so most shoppers will leave home, shop and return within an hour, giving SCA centres a competitive advantage over larger centres with challenges such as access, parking and walking time within the centre. Cost-efficient budget marketing campaigns focus on digital and in-centre activities, to build meaningful connections with shoppers and retailers and supporting causes that matter in the local communities via their ‘Stronger Communities’ program. And it’s not ‘lip-service’ stuff either. Sharma gets expansive on some of the marketing initiatives. “You’ve got to involve everyone and in the regional locations there’s a greater willingness. We have a few gyms in our centres and so we’ll look to run seniors walking groups mid-week and the gym guys take them for a stretching session. In one centre, the management heard of a child who’d never had a Santa photo because he couldn’t take crowds so they organised a ‘Sensitive Santa’ session and the couple brought their son; it was a four-hour drive! In-centre marketing prioritises community interests like cooking classes, kids activities and lifestyle/wellness issues – simple at the core but real issues in the country towns with more limited services than metro markets. “One of our promotions zoomed in on the need to donate socks to the needy,” said Sharma. “You know, when people donate clothes, they get lots of shirts, coats, jeans, trousers, dresses, sweaters and the like, but hardly anyone ever donates socks.” We didn’t know, but when a COO of an 86-shopping centre company tells you, what we do know is that he’s close to the action!