There’s a proposed merger reform. All shopping centre mergers and acquisitions above $35 million will need ACCC approval. In short, it’s to prevent any owner dominating a specific trade area. But it could have the opposite effect; it could well eliminate open competition for an asset. Luke Sikora, Head of Stakeholder Engagement, Shopping Centre Council of Australia (SCCA) explains…

In my first contribution to Shopping Centre News, I want to raise an issue that’s worthy of the industry’s awareness; if not already. This is of course the Federal Government’s proposed merger reform, under potential changes to the Competition and Consumer Act.

Yes, another brick in the wall of regulation facing the industry on top of changes, or proposed changes that will have a material impact on our industry.

This ranges from proposed laws in relation to unfair trading practices, changes to our privacy legislation which we believe will be problematic for community safety measures such as CCTV, through to industrial relations changes that are in their early days.

Other issues such as energy related regulation continue to emerge, along with changes in relation to vapes and tobacco.

As it stands, the Federal Government is proposing a single, one size fits all, merger control system by way of a compulsory Australian Competition and Consumer Commission (ACCC) notification regime.

What this means is the ACCC will, subject to laws passing the Parliament, need to run its ruler across all shopping centre mergers and acquisitions with a value of $35 million or more.

Approval would then be required from the ACCC to proceed with the merger or acquisition.

In simple terms, under the law the sale of a shopping centre is captured under the banner of mergers and acquisitions.

With a proposed threshold of $35 million, this would, thus, result in a large volume of proposed shopping centre transactions in Australia requiring ACCC notification and approval. This is regardless of the sale’s likely or conceivable impact on competition in the relevant market.

On our analysis, which we’ve provided to The Treasury and Minister, a $35 million threshold would trigger at least one transaction a week having to go in front of the ACCC based on a ten-year average.

By way of example, under the proposed new scheme, this would include the $74.25 million sale of Cooleman Court to Region Group, the $70 million sale of Halls Head Central by Vicinity Centres and ISPT to Centuria Capital Group, and the $35 million purchase of Richmond Mall by IP Generation.

These are just some of the sales that occurred within the past months. This list is quite long!

Halls Head Central

The concern is that a wholesale change in law which will result in a broadbrush approach to all mergers and acquisitions across all markets, perhaps misses the mark on where such reforms and critical policy attention should be focused on – concentrated markets.

By not focusing solely on concentrated markets, or market duopolies, such as grocery, airlines and banking, the government has not recognised that shopping centres operate in the highly competitive retail tenancy market, not a notional ‘shopping centre’ specific market.

Also, by any measure of market concentration; we are not a concentrated market.

The Productivity Commission recognised this in previous inquiries, noting the retail tenancy market extends beyond shopping centres.

This includes shopping strips or high streets, retail outlets that handle bulky goods or act as direct factory outlets, as well as retail shops in other commercial buildings.

With more than 800 different owners of shopping centres in Australia (and thousands of owners of retail spaces outside of shopping centres), there are no significant barriers to entry to being a landlord in the retail tenancy market in Australia.

Examining this by Gross Lettable Area Retail (GLAR), shopping centres comprise approximately 45% of GLAR nationally, with the remainder made up of these other retail tenancies. And the largest shopping centre owners control less than 5% of the GLAR available in the market across Australia.

In terms of retail sales generated from the space that it leases to tenants, as an example, one major shopping centre owner’s centres generate 6.7% share of total retail sales across Australia. So, whether measured in terms of GLAR or retail sales generated from that GLAR, across Australia the figures show the retail tenancy market is highly competitive.

However, where there is any doubt, the cautious and prudent course – as per the current process – the proposed acquirer voluntarily notifies the ACCC and waits for the ACCC’s informal clearance.

Key concerns

We believe the proposed new compulsory notification regime by the ACCC would undermine the current processes by which the sale of shopping centres typically takes place.

If, for instance, notification to the ACCC and approval by the ACCC is required before EOIs are lodged and bids are made, then potential purchasers will be put to considerable additional expense and effort in circumstances where it will not be known by them whether they will be the highest bidder or, even if they are, whether the vendor will accept that bid.

This would also mean significant costs and resources (including within the ACCC). This will inevitably result in there being less entities interested in speculating these costs on the chance of being the winning bidder. Less bidders means less competition.

Richmond Mall

It would be very problematic and disruptive for the sales and acquisitions of shopping centre assets to be subject to the compulsory notification and ACCC review regimes.

Transactions, including auctions and other competitive bidding processes for the sale of shopping centre assets, cannot be suspended for a period while the ACCC conducts its own assessment of the proposed acquisitions, an assessment that can take months, if not longer.

The delays in seeking and securing ACCC approval will also likely surpass the typical 30-day period for marketing and receiving EOIs to the likely detriment of the vendor. By reason of potential purchasers having to notify and seek clearance of the ACCC, these prospective purchasers will get to know whether they are the only bidder and may adjust their bids accordingly, again to the likely detriment of the vendor.

Further, with the ACCC likely needing to make its own enquiries and seek industry feedback, there is the risk of other prospective purchasers seeking to influence the ACCC with a view to knocking out their competing bidders.

As such, the whole sales process risks becoming more costly, more unwieldy, and more uncertain for no tangible gains.

For listed companies, such a regime may cause complex ASX disclosure issues as potential rather than completed sales are likely to become known in the marketplace.

It is well known in our sector that ‘time kills deals’.

The longer the delays in reaching completion, the more likely it is that the purchaser will pull out, irrespective of whether this is because of the ACCC having reservations or not. Cap rates might change and access to finance might become more difficult.

Another issue that needs to be considered is an effective delineation between mergers and acquisitions.

Currently, many shopping centre transactions occur and are publicly announced on the same day, with no engagement with the ACCC as it is not always considered necessary, based on an assessment of relevant legal and market issues.

The current substantial penalties that may be imposed on the acquisitions of assets that breach the Act, strongly encourage shopping centre owners (and aspiring shopping centre owners) to obtain their own careful and considered legal and professional advice as to whether any proposed acquisition will comply with the Act.

Company to company mergers are rare, typically slow, and involve fewer competing parties. Whereas the acquisition of a shopping centre can take place quickly and involve numerous competing parties.

Also, if a company acquires full or part ownership of a real asset, it cannot be considered to have merged with the vendor, it simply has ownership of, or a financial interest in the asset.

The SCCA believes it is the industry, rather than the ACCC, that is better able to make relevant assessments and determinations relating to the sale and purchase of shopping centres, including whether their proposed acquisition complies with relevant laws.

Accordingly, we have asked government and the ACCC to identify and target sectors with market concentration issues or inherent risks to require only their engagement with the ACCC.

A focus on company to company mergers where thresholds are met and exclusion of asset acquisitions, unless in concentrated markets, is more targeted and appropriate.

It is essential that flexibility remain in the system to allow our industry to continue to make determinations, and not be burdened with delays or additional administrative and compliance burdens by the ACCC.

Under the proposals, Treasury anticipates the ACCC will receive 300 merger notifications each year, however shopping centres alone amount to 55 annual transactions on average above the ACCC’s proposed $35 million transaction value threshold.

In addition to this, we expect the inclusion of many thousands of asset acquisitions, including potentially hundreds across the commercial property market such as office and investment grade industrial.

To the government’s credit, it has been open to this discussion. The Assistant Minister has met with us to hear our concerns and listen to feedback on how the government’s reforms can best meet needs.

We are not opposed to change, but facts are facts. A $35 million acquisition threshold will give rise to substantial volumes of acquisitions needing to be considered by the ACCC, including acquisitions that would not give rise to any market concentration issues.

Based on further analysis undertaken for the government, we believe that a $150 million threshold would represent a more balanced and practicable threshold, and be more in line with the desired reforms.

A $150 million threshold would allow the ACCC to focus on transactions that are of a size and scope that could still have an impact (albeit minimal) on the retail tenancy markets, and focus where the need lies, on concentrated markets.

This article is published in the latest edition of SCN magazine.