Retail property to go from strength to strength
The retail property market is expected to continue to go from strength to strength over the next year thanks to the low interest rate environment, a lack of stock and a strong wave of capital looking for this stock.
That’s the view of James Wilson, director, NSW, retail investment services, Colliers International, who noted that retail property on the eastern seaboard and in metropolitan areas were in hot demand, with Sydney being the most highly prized market.
“But there’s a lack of quality stock coming through,” he recently told Inside Retail Weekly. “It’s almost the question that if I sell my asset, what do I do with my capital.
“Retail investment activity has been elevated for four years now,” explained JLL’s director of retail investments in Queensland, Jacob Swan. “2015 has continued that trend with a high level of sales activity. We’re seeing values rise more significantly this year than we have in previous years as competition for assets and lower cost of capital has driven down yields.”
Swan said JLL’s research suggested that investment market conditions would remain supportive of the current pricing levels. “We are likely to see some further modest yield compression in the next six to 12 months,” he said.
Similarly, Alex Pham, research manager, Cushman & Wakefield, suggested that with investor demand remaining strong in a record low interest rate environment, retail property prices will continue to rise, albeit at a more moderate rate compare to the past 12 months.
“Retail property continues the deliver the best risk-adjusted performance compared to the other property classes of office and industrial,” Pham argued. “On the demand side, low interest rates and strong capital inflow from offshore buyers are the main factors driving the investment market forward. On the supply side, portfolio rebalancing and capital recycling are the main factors driving supply of retail stock. There is, however, a lack of new development of shopping centres at present.”
Shift to smaller centre trading
Colliers International’s Retail Investment Review for the 2014/15 financial year noted that, by sector, there had been a shift to smaller centre trading and fewer large-scale transactions.
“The availability of smaller assets coming to market meant that sales were particularly strong in the $10 million to $30 million price bracket, with this category accounting for more than half the total 157 sales for the year,” the report stated.
The report outlined how neighbourhood centres once again dominated sales activity by volume in 2014/15, with a substantial jump in the number of centres sold – up 75 per cent to a record 84 centres. This part of the market benefited from strong demand for quality non-discretionary focused centres, reflecting the continued solid performance of food-based retailing.
It added that regional shopping centres continue to perform robustly, justifying their status as one of the best risk-adjusted commercial property assets in Australia. Their size, diverse product offerings and their ability to continually capture retail spending dollars (even in competitive trading environments like now) set these assets apart from most other commercial property assets.
Nonetheless, trading in sub-regional shopping centres dominated activity by value, with 35 assets sold for a total of $2.6 billion as risk appetites broadened.
Colliers believes that purchasers are focusing on centres that have development or repositioning potential. The company said secondary centres are also being looked at more favourably, with a shift in pricing occurring across the market.
Swan agreed, noting that shopping centres in ideal locations, and with the potential to be converted to residential, are selling for a premium.
He said most investor groups were actively chasing acquisitions at present.
“In the sub-$50 million bracket, it has been syndicates and private investors really driving the majority of transactions. There is a good balance in the market at the moment, with some vendors willing to sell assets to recycle into other investments. Combined with solid demand, this is creating really strong transaction volumes.”
“There does not appear to be a soft spot in the market, with large format retail also enjoying significant yield compression,” said CBRE Australia’s national director of retail investments, Peter Rossi.
“The Aventus IPO is expected to attract significant attention and its capitalised position will fuel more demand for investment stock in this sector. The marketing campaigns for World Square and City Centre Arcade will be interesting campaigns with strong interest expected from offshore capital.”
Swan listed current hotspots in the market as neighbourhood shopping centres and single tenanted retail warehouses such as Bunnings or freestanding supermarkets.
“Most of the retail sub-sectors are performing well at present, fuelled by a rebound in retail spending over the last year,” he said. “There is no one retail sub-sector which is weak at the moment, but there are localised cases where some centres are underperforming due to existing competition or new supply.”
Transport hub trend
Wilson observed that a recent trend in the retail property market has been the rise of purchasers pursuing shopping centres close to major transport hubs, such as railway and bus interchanges.
“This is due to the large area they occupy, which will result in a higher and better land value once the residential upside can be unlocked,” he said.
He said buyers at present included institutions, syndicators, developers and high net worth investors.
Big sellers at the moment were retailers such as Coles and Woolworths.
“They have been developing their own stock in recent years and are taking advantage of the market conditions,” he said.
In addition, institutions were off-loading non-core assets, as were private investors who had got the centre to a certain point, but didn’t have the capability to drive it to the next level.
Foreign buyers were mainly from China, Malaysia and Singapore, he said.
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