AN ANALYSIS OF THE INVESTMENT APPRAISAL OF ENCLOSED REGIONAL SHOPPING ...

345 Pages·2001·1.32 MB·English

AN ANALYSIS OF THE
INVESTMENT
APPRAISAL OF
ENCLOSED
REGIONAL SHOPPING
CENTRES – AN
AUSTRALIAN
PERSPECTIVE
by
Spike Boydell
A thesis submitted for the degree of
Doctor of Philosophy
July 1998
Liverpool John Moores University
Abstract
AN ANALYSIS OF THE INVESTMENT APPRAISAL OF ENCLOSED REGIONAL
SHOPPING CENTRES – AN AUSTRALIAN PERSPECTIVE
by Spike Boydell
A thesis submitted for the degree of
Doctor of Philosophy
Chairperson of the Supervisory Committee: Professor Peter H. Morgan
School of the Built Environment
This doctoral thesis undertakes an analysis of the investment appraisal of enclosed regional (or
larger) shopping centres from an Australian perspective. The aim of the thesis is to provide a
deeper understanding of the valuation and investment analysis of this $14 billion sector of the
Australian economy. The objective is to evolve conceptual frameworks to model the key
influences and relationships that affect the players and the process. The outcome is a detailed
and thorough investigation, initiated from an extensive literature review and thereafter
grounded in the analysis of experiential qualitative data derived directly from the key
participants in the Australian regional shopping centre sector. Whilst this investment sector is
significant in terms of the capital value that it represents, no previous study of this type has
been undertaken.
Through a thorough literature review that focuses on and around appraisal and depreciation,
and subsequent pilot studies, a series of conceptual frameworks are derived to model the
influences and processes related to owners, developers, managers, architects and valuers.
Using a qualitative methodology grounded on the experience of the key players (‘experts’ in
qualitative methodology) a significant empirical data set was derived. This data was analysed
using QSR NUD·IST , a ‘Non-numerical Unstructured Data Indexing, Searching and
TM
Theorizing’ software. The analytical process allowed the evolution of the conceptual
frameworks to facilitate, for the first time, the modelling of actual processes and relationships in
the investment appraisal of enclosed regional shopping centres in Australia.
The outcome represents a significant advancement in understanding this area, in particular the
relationship between the main ‘players’ of developer, property manager, architect and with
particular reference to the valuer and the owner. This research has proven the following
issues: shopping centres are an evolving asset (they gradually mature in contrast to their office
investment counterparts); refurbishment and expansion mask depreciation; owners spend
money to depreciate the competition, whilst benefiting their development, management and
architectural subsidiaries; investments change hands between a few major players at low yields
to maintain portfolio value in an oligopolistic market; there is general confusion over the
investment terminology; and, the valuer is subject to intimidation and is expected to forecast
with limited information. A new category of depreciation, competition depreciation, is identified.
This thesis strengthens existing academic literature on depreciation, investment appraisal and
regional shopping centres, and as such provides an original and significant contribution to this
field of knowledge.
TABLE OF CONTENTS
CHAPTER 1
INTRODUCTION..................................................................................................................................1
1.1 Introduction........................................................................................................................................1
1.2 Research problem and hypotheses........................................................................................................3
1.3 Justification for the research................................................................................................................5
1.4 Methodology.......................................................................................................................................7
1.5 Outline of the thesis............................................................................................................................9
1.6 Definitions........................................................................................................................................10
1.7 Delimitation’s of scope and key assumptions.....................................................................................11
1.8 Conclusion........................................................................................................................................12
References: Chapter 1.................................................................................................................................13
CHAPTER 2
LITERATURE REVIEW......................................................................................................................16
2.1 Introduction......................................................................................................................................16
2.2 Parent disciplines and classification models.......................................................................................18
2.2.1 Enclosed Shopping Centre............................................................................................................18
2.2.2 The Role of Shopping Centres in Strategic Property Portfolio Management...................................20
2.2.3 Forecasting (preamble).................................................................................................................32
2.3 Appraisal..........................................................................................................................................36
2.3.1 Concepts of Appraisal..................................................................................................................36
2.3.2 Market Value...............................................................................................................................38
2.3.3 The Three Approaches?................................................................................................................43
2.3.4 Highest & Best Use Analysis........................................................................................................45
2.3.5 The market (sales) comparison approach to value..........................................................................47
2.3.6 The cost approach to value...........................................................................................................50
2.3.7 The income or capitalisation approach..........................................................................................52
2.3.8 Discounted cash flow analysis......................................................................................................57
2.3.9 Commentary and Critique of the AIVLE DCF Standard ...............................................................58
2.3.9.1 Application........................................................................................................................60
2.3.9.2 Concepts............................................................................................................................61
2.3.9.3 Industry Standards for Discounted Cash Flows....................................................................62
2.3.9.4 Layout of Discounted Cash Flows.......................................................................................65
2.3.9.5 Reporting Requirements.....................................................................................................68
2.3.9.6 Responsibilities..................................................................................................................70
2.3.9.7 International Perspective....................................................................................................70
2.3.9.8 Review..............................................................................................................................70
2.3.10 Depreciation...........................................................................................................................71
2.3.10.1 The ‘American School’......................................................................................................76
2.3.10.2 ‘Lemons’...........................................................................................................................80
2.3.10.3 Economic Life....................................................................................................................82
2.3.10.4 UK Research......................................................................................................................82
2.3.10.5 The shopping centre life-cycle............................................................................................86
2.3.10.6 Physical obsolescence........................................................................................................93
2.3.10.7 Functional obsolescence.....................................................................................................94
2.3.10.8 Economic obsolescence......................................................................................................95
2.3.10.9 Other categories of depreciation/obsolescence.....................................................................95
2.3.10.10 Masking obsolescence.......................................................................................................96
2.3.10.11 The length of a property life cycle......................................................................................96
2.3.10.12 Optimal time to renovate a shopping centre......................................................................101
2.4 Conclusion......................................................................................................................................104
References: Chapter 2...............................................................................................................................105
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CHAPTER 3
METHODOLOGY..............................................................................................................................114
3.1 Introduction....................................................................................................................................114
3.1.1 Establishing a Philosophy...........................................................................................................115
3.1.2 The Research Dilemma................................................................................................................115
3.1.3 Extension Frequency....................................................................................................................118
3.1.4 Art or Science?...........................................................................................................................119
3.1.5 Grounded Theory........................................................................................................................120
3.2 Justification for the paradigm and methodology................................................................................121
3.2.1 Application to Property Investment Appraisal..............................................................................121
3.2.2 Supporting Software...................................................................................................................122
3.3 Research procedures........................................................................................................................124
3.3.1 Risk, Growth and Depreciation....................................................................................................124
3.3.2 EMPIRICAL WORK..................................................................................................................125
3.3.2.1 Conceptual Framework....................................................................................................125
3.3.2.2 Owners............................................................................................................................127
3.3.2.3 Developers.......................................................................................................................131
3.3.2.4 Managers.........................................................................................................................132
3.3.2.5 Architect..........................................................................................................................133
3.3.2.6 Valuers............................................................................................................................134
3.3.2.7 Analyst............................................................................................................................137
3.3.2.8 Expert Interviews..............................................................................................................137
3.4 Ethical considerations......................................................................................................................138
3.5 Analysis..........................................................................................................................................139
3.6 Conclusion......................................................................................................................................140
References: Chapter 3...............................................................................................................................142
CHAPTER 4
ANALYSIS OF DATA.......................................................................................................................145
4.1 Introduction....................................................................................................................................145
4.2 Subjects..........................................................................................................................................146
4.3 The Analytical Process....................................................................................................................149
4.3.1 The Valuer Analytical Detail:.....................................................................................................150
4.4 Analysed Valuer Interviews.............................................................................................................166
4.5 Analysed Owner Interviews.............................................................................................................219
4.6 Patterns of data for the investment appraisal of enclosed shopping centres........................................249
4.7 Conclusion......................................................................................................................................250
References: Chapter 4...............................................................................................................................251
CHAPTER 5
CONCLUSIONS AND IMPLICATIONS............................................................................................252
5.1 Introduction....................................................................................................................................252
5.2 Conclusions about the research hypothesis: an analysis of the investment appraisal of enclosed regional
shopping centres – an Australian perspective..............................................................................................253
5.2.1 Shopping centres are an evolving asset........................................................................................254
5.2.2 Owners will have to spend about 100% of what they pay for the asset within the first ten years to
maintain the yield and income..............................................................................................................254
5.2.3 Refurbishment and expansion mask the depreciation....................................................................255
5.2.4 Owners spend money to depreciate the competition.....................................................................255
5.2.5 Owners also have development, management and architectural subsidiaries that gain employment and
income from the continual expansion process........................................................................................256
5.2.6 Acquire investments at low yields to maintain portfolio value......................................................256
5.2.7 Let the valuer struggle to find information...................................................................................257
5.2.8 The valuer is as confused as everybody else about the terminology...............................................258
5.2.9 Intimidation................................................................................................................................258
5.2.10 Who can forecast beyond 3 or 4 years?......................................................................................259
5.3 Conclusions about the research problem...........................................................................................259
5.4 Implications for theory....................................................................................................................261
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5.4.1 Appraisal....................................................................................................................................261
5.4.2 Depreciation...............................................................................................................................262
5.4.3 Portfolio Strategy........................................................................................................................262
5.4.4 Property Research.......................................................................................................................262
5.5 Implications for policy and practice.................................................................................................263
5.6 Limitations.....................................................................................................................................263
5.7 Further research..............................................................................................................................264
References: Chapter 5...............................................................................................................................266
BIBLIOGRAPHY 267
APPENDICES I
Appendix One: Meeting with AMP Property Investments...............................................................................II
Appendix Two: Overseas Travel Report.....................................................................................................VIII
Appendix Three: ‘Expert’ Interviewees........................................................................................................XI
Appendix Four: Shopping Centre Classifications.........................................................................................XII
Appendix Five: Regional Centres Refurbishment/Extension Profile............................................................XVI
Appendix Six: Shopping Centre ‘Players’...............................................................................................XVIII
Appendix Seven: Letter of Introduction to ‘Experts’.................................................................................XXII
Appendix Eight: Nodal References.........................................................................................................XXIII
Appendix Nine: Sample ‘original’ transcription of ‘Expert’ interview...................................................XXXIX
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LIST OF FIGURES & TABLES
FIGURE 2-1: LITERATURE REVIEW..............................................................................................................17
FIGURE 2-2: TOTAL RETURN SINCE PURCHASE............................................................................................21
FIGURE 2-3: CAPITAL RETURN....................................................................................................................22
FIGURE 2-4: TOTAL RETURN SINCE PURCHASE............................................................................................23
FIGURE 2-5: TOTAL RETURN ON YEAR........................................................................................................24
FIGURE 2-6: PORTFOLIO STRATEGY............................................................................................................30
FIGURE 2-7: MARKET VALUE.....................................................................................................................39
FIGURE 2-8: DEFINING YIELDS...................................................................................................................55
FIGURE 2-9: AIVLE DCF STANDARD (1 OF 2)............................................................................................63
FIGURE 2-10: AIVLE DCF STANDARD (2 OF 2)..........................................................................................65
FIGURE 2-11: DEPRECIATION......................................................................................................................72
TABLE 2-1: DEPRECIATION AND RENTAL VALUE, YEARS 1 TO 20..................................................................83
TABLE 2-2: DEPRECIATION IN THE OFFICE SCENARIO...................................................................................86
FIGURE 2-12: THE PROPERTY LIFE CYCLE...................................................................................................87
FIGURE 2-13: REAL VALUE OVER TIME........................................................................................................89
TABLE 2-3: PHYSICAL OBSOLESCENCE........................................................................................................94
TABLE 2-4: PROPERTY LIFE EXPECTANCY (IN YEARS)..................................................................................97
TABLE 2-5: DEPRECIATING RETAILER PERFORMANCE OVER TIME...............................................................100
FIGURE 3-1: CONCEPTUAL FRAMEWORK: OVERVIEW................................................................................126
FIGURE 3-2: CONCEPTUAL FRAMEWORK: OWNER.....................................................................................128
TABLE 3-1: REGIONAL SHOPPING CENTRE OWNERSHIP..............................................................................129
TABLE 3-2: OWNERSHIP OF CENTRES BY PARTIES INTERVIEWED................................................................130
TABLE 3-3: DEVELOPERS OF REGIONAL SHOPPING CENTRES......................................................................131
FIGURE 3-3: CONCEPTUAL FRAMEWORK: DEVELOPER...............................................................................131
FIGURE 3-4: CONCEPTUAL FRAMEWORK: MANAGER.................................................................................133
TABLE 3-4: MANAGERS OF REGIONAL SHOPPING CENTRES........................................................................132
FIGURE 3-5: CONCEPTUAL FRAMEWORK: ARCHITECT...............................................................................134
TABLE 3-5: ARCHITECTS OF REGIONAL SHOPPING CENTRES......................................................................134
FIGURE 3-6: CONCEPTUAL FRAMEWORK: VALUER....................................................................................135
FIGURE 3-7: QSR NUD·ISTTM PROCESSES................................................................................................140
FIGURE 4-1: EVOLVED CONCEPTUAL FRAMEWORK: VALUER..................................................................147
FIGURE 4-1: EVOLVED CONCEPTUAL FRAMEWORK: VALUER (REPEATED)...............................................167
FIGURE 4-2: EVOLVED CONCEPTUAL FRAMEWORK: OWNER....................................................................219
iv
ABBREVIATIONS
Whilst all acronyms are defined before they are adopted in the thesis, the following is a reference
summary of the main abbreviations adopted in thesis.
ABS Australian Bureau of Statistics
ACSC Australian Council of Shopping Centres
AIVLE Australian Institute of Valuers and Land Economists
AMP Australian Mutual Provident Fund
ARY All Risks Yield
AUBEA Australian Universities Building Educators Association
BCSC British Council of Shopping Centres
BOMA Building Owners and Managers Association
CALUS Centre for Advanced Land Use Studies
Cap Rate Capitalisation Rate
CBD Central Business District
CPI Consumer Price Index
CV Capital Value
DCF Discounted Cash Flow
DDS Discount Department Store
EMS Environmental Management Systems
FR & I Full Repairing and Insuring
GIM Gross Income Multiplier
GLA Gross Lettable (leasable) Area
HBU Highest and Best Use
ICSC International Council of Shopping Centers
IRR Internal Rate of Return
ISVA Incorporated Society of Valuers and Auctioneers
JLW Jones Lang Wootton
MAI Member of the Appraisal Institute
MIRR Modified Internal Rate of Return
NOI Net Operating Income
NPV Net Present Value
NUD·IST Non-numerical Unstructured Data Indexing, Searching and Theorizing
TM
OAR Overall Rate
PCA Property Council of Australia
PV Present Value
QIC Queensland Investment Corporation
v
QSR Qualitative Solutions and Research Pty. Ltd.
REITs Real Estate Investment Trusts
RICS Royal Institution of Chartered Surveyors
SCD Shopping Centre Database
TroY Total Return on Year
TRsP Total Return since Purchase
UK United Kingdom
ULI Urban Land Institute
US United States of America
WACC Weighted Average Cost of Capital
YP Years Purchase
vi
ACKNOWLEDGMENTS
A doctoral thesis is a long and often lonely path. What makes the journey worthwhile are the
places you visit, and more importantly, the people that you meet along the way. Many have
influenced me in my understanding of life. They know who they are, and I thank them with my
heart and soul.
I formally acknowledge the financial support of Healey & Baker, Property Consultants, London
for the initial ‘pump-priming’ afforded by a Healey & Baker Award in 1992. Also, the
University of Queensland for awarding me two academic scholarships on full pay which enabled
me to research full time and compile my qualitative data. The scholarships took place January –
July 1995 and August – December 1996. I also thank my ‘experts’ who provided a basis for the
empirical data; they are named in Appendix Three.
My two supervisors, Peter Morgan and Neil Crosby, have remained supportive in extension
mode, despite the tyranny of distance and inevitable postal delays in pre-email times, since my
move to Australia in 1993. They have been aided in the Antipodes by Brian Waghorn who,
armed with trusty red pen, has voluntarily accepted the role of mentor in Australia.
My family remains with me despite the enormous challenges of completing a doctoral thesis
whilst progressing an academic career which has spanned two hemispheres. It has been a long
and truly educational journey for us all. My heartfelt thanks go to Marie, Edward and Eleanor.
It is customary to thank the typist. That was me, word by word, figure by figure.
Spike Boydell
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C h a p t e r 1
INTRODUCTION
1.1 Introduction
It was Napoleon I (née Bonaparte) who first described England as a nation of shopkeepers.1
However, the commentary in Wealth of Nations by his contemporary, Adam Smith2, still holds
true more than two centuries after it was scribed:
“To found a great empire for the sole purpose of raising up a people of customers, may at first sight appear a
project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers;
but extremely fit for a nation whose government is influenced by shopkeepers.”
In the intervening two centuries the quotation could be expanded to economies largely founded
on consumerism. This is epitomised by the population eagerly seeking materialistic instant
gratification within suburbia’s new cathedrals 3 - the regional shopping mall. These new
“temples” to consumerism are now evident throughout the world - and there has been a
proliferation of enclosed shopping centres over the last twenty years. Within Australia, in
particular, the enclosed shopping centre has enjoyed recent success as an investment option. To
quote David Lowy,4 Managing Director of the successful Westfield Holdings with extensive
interests in Australia and the USA:
“...well managed, major regional shopping centres are now being recognised for what they are, the best form of real
estate investment and in fact, probably the best form of any investment.”
This statement is common as an industry view, especially in its attempt to hype up the retail
market sector. However, behind this facade lies an untold, or hushed, story that these new
“cathedrals” are probably more depreciation prone than other property asset classes. Returning

1 O’Meara (1985)
2 Smith (ed. Todd) (1976)
3 Duffy (1994)
4 Lowy (1993)