Vicinity Centres buoyed by third-quarter retail rebound but warns it may not last

National shopping centre group Vicinity Centres (ASX: VCX) has defied a challenging retail environment to report a surge in sales over the third quarter.

However, the owner of Australia’s largest shopping centre, Chadstone, has warned that growth will moderate as cost-of-living pressures begin to bite over the remainder of the year.

Vicinity reported a 13 per cent increase in year-on-year retail sales across its portfolio of 60 shopping centres in the three months to the end of March, with the group citing ‘sustained retail sector resilience and operational execution’ for the result.

The performance puts Vicinity on track to deliver FY23 funds from operations (FFO) at the top end of previous guidance between 14c and 14.6c per security.

However, the full-year distribution will be at the lower end of the target range of 95 to 100 per cent of adjusted funds from operations (AFFO) of between 11.8c and 12.4c per security.

Despite the softer outlook, Vicinity CEO Peter Huddle remains confident in the group’s ability to meet the challenges ahead.

“While retailer confidence and retail sales growth remained robust during the quarter, our outlook for 4Q FY23 and into FY24 remains cautious due to the ongoing escalation of household living costs and the potential for consumption to soften,” Huddle says.

“That said, the strong operating and financial performance delivered in the financial year to date enabled us to guide to around the top end of our FY23 earnings guidance range.

“With a flexible balance sheet and strong credit metrics, Vicinity remains well positioned to navigate market uncertainty and at the same time, invest in its growth agenda.

“Furthermore, in an increasingly capital constrained environment, we are prioritising long-term growth and value accretion and judiciously deploying capital accordingly.”

Vicinity has reported an extra 16 million customer visits across its portfolio during the quarter compared to a year earlier, with foot traffic now sitting at 88 per cent of pre-pandemic levels.

The group’s CBD properties have yet to fully recover as the group reveals that excluding the CBD centres, the portfolio is sitting at 93 per cent of 2019 foot traffic.

However, Vicinity says its CBD assets are gaining momentum with weekday visitation up 52 per cent in the March quarter compared to a year ago.

“Similarly, weekend visitation across Vicinity’s CBD assets in 3Q FY23 was 35 per cent higher than 3Q FY22 as day-trippers continue to frequent CBD centres and international tourism recovers (now 70 per cent of pre-pandemic levels),” the group says.

Vicinity’s premium centres led growth during the quarter, with sales up 20.3 per cent compared to the group average of 13 per cent. The group’s core centres were up 8.4 per cent, which Vicinity says reflects continued strength of both discretionary and non-discretionary demand.

“The Australian retail sector has once again demonstrated its resilience in the face of rising household costs and heightening near-term macroeconomic uncertainty,” Huddle says.

“It was particularly encouraging to see the positive momentum in CBD visitations during the quarter, which underpinned a 37.2 per cent uplift in CBD sales and, in fact, our CBD portfolio was a key contributor to our overall portfolio sales performance.”

Most of the group's retail specialty categories delivered double-digit sales growth, with cafes and restaurants showing the strongest recovery – up 29.3 per cent. Excluding the luxury category, apparel and footwear sales were the next strongest, rising 18.9 per cent and largely driven by the CBD recovery and the continued outperformance of Vicinity’s Outlet portfolio.

Vicinity’s result was aided by the completion of a number of developments including The Social Quarter at Chadstone which opened in March to deliver 17 entertainment and dining tenants across 10,350 sqm of new space.

A $485 million upgrade of the Melbourne retail centre is under way that will include a revitalised fresh food precinct, The Market Pavilion and a new 20,000sqm office tower which is set for completion in mid-2024.

The development of a four-level office podium in the south precinct of Melbourne's Box Hill Central was completed during the quarter, delivering co-working space provider Hub Australia with its first suburban offering across 4,000sqm.