Shopping Centre Residential Conversions To Create New Asset Class

Australia's retail property sector is experiencing a structural shift that most investors haven't fully recognised. Shopping centres with extensive car parking could potentially be rezoned for residential development, creating mixed-use assets with fundamentally different risk and return profiles.

Scentre Group's exploration of developing residential units across their Westfield network illustrates this potential transition. The company is in discussions about projects like potential homes at Westfield Warringah Mall and Westfield Tuggerah, which could involve converting car parks into medium-density housing within established transport corridors.

Asset Allocation Flexibility

Shopping centres possess operational flexibility that other commercial properties lack. They can segment their land holdings for multiple revenue streams without disrupting core retail operations.

Office buildings can't easily convert portions to residential without compromising their primary function. Shopping centres already operate multiple tenancy models across their footprint, making mixed-use integration more straightforward.

The strategic advantage lies in proximity to transport infrastructure. These assets typically locate near metro stations and bus interchanges, placing them within transit-oriented development (TOD) corridors where residential demand could support higher pricing.

This represents a shift in asset valuation methodology. Traditional retail metrics don't capture the potential residential development value of car parks adjacent to transport infrastructure.

Market Positioning

Australian shopping centres occupy large land parcels with low-rise buildings and extensive surface parking. This configuration provides conversion opportunities that aren't available in more constrained urban environments.

Industry research suggests mixed-use developments can achieve higher property values than single-use retail assets. In Australia's TOD corridors, this premium could reflect the scarcity value of developable land near transport nodes.

TOD Corridor Economics

Proximity to TOD corridors determines the economic viability of shopping centre conversions.

Centres within 800 metres of rail stations that secure residential approvals may see asset revaluation. Those in car-dependent locations without transport connections are unlikely to justify conversion economics due to lower residential pricing and higher infrastructure costs.

This creates distinct market segments. TOD shopping centres could transition to integrated mixed-use assets with different yield profiles and growth characteristics. Suburban centres maintain traditional retail operations serving car-dependent catchments.

For real estate investors, this segmentation may influence portfolio allocation decisions and financing structures.

Policy Environment

Both major political parties support mixed-use development, creating policy stability for long-term financing decisions.

Labor promotes these developments as housing policy. The Coalition supports them for economic development. This bipartisan approach reduces political risk for lenders considering long-term exposure to conversion projects.

The NSW Government's implementation of AI-powered planning approvals represents operational efficiency improvement. Planning Minister Paul Scully confirmed these digital tools aim to reduce approval timeframes, decreasing development timeline risk for borrowers and lenders.

Development Timeline

The timeline for residential occupancy extends 2-3 years from current rezoning approvals. First residents could potentially move in during 2027-2028, assuming approvals are secured.

This timeline creates opportunities for construction financing and subsequent investment in completed mixed-use assets.

Once Scentre demonstrates model profitability, there may be activity in the listed REIT sector. Residential developers and mixed-use specialists could potentially acquire shopping centre REITs for their TOD assets, creating transaction opportunities.

Traditional retail REITs understand shopping centre operations but may lack residential development expertise. New ownership might accelerate conversions while changing asset risk profiles and financing requirements.

Integration Requirements

Government approval conditions require functional integration between residential and retail components. Developers must demonstrate cohesive mixed-use design or risk approval withdrawal.

This integration requirement creates more complex financing structures but produces higher-quality assets with stronger performance characteristics. For CFOs evaluating these projects, the integration premium justifies more sophisticated financial modelling.

Optimal developments integrate apartments, retail, office space, and transport connections. Industry analysis suggests well-integrated mixed-use developments may achieve higher rental yields than comparable single-use properties.

Capital Deployment Considerations

The convergence of supportive policy settings, streamlined approvals, and underutilised land adjacent to transport infrastructure creates specific investment opportunities.

For commercial real estate investors and lenders, capital allocation should focus on shopping centres within TOD corridors, particularly those with established transport connections and supportive planning frameworks.

The transformation from single-use retail to mixed-use assets could represent a structural change in Australian commercial property. The financing opportunities reflect this fundamental shift in asset characteristics and performance metrics.

References

1. Scentre Group, "Housing Development Application outcome - Westfield Warringah," 24 October 2024. Available at: https://www.scentregroup.com/news-and-media/latest-news/hda-outcome-westfield-warringah

2. NSW Department of Planning, Housing and Infrastructure, "Transport Oriented Development (TOD) Program." Available at: https://www.planning.nsw.gov.au/policy-and-legislation/housing/transport-oriented-development-program

3. UDIA NSW, "Making TODs Work," June 2024. Available at: https://www.udiansw.com.au/wp-content/uploads/2024/06/Making-TODs-Work-June-2024.pdf

4. Property Council of Australia, "Industry welcomes progress on Transport Oriented Development," 15 July 2024. Available at: https://www.propertycouncil.com.au/media-releases/industry-welcomes-progress-on-transport-oriented-development