[+] Private Equity on a Shopping Spree

Interest rate rises may have put a dent in the residential market but Australia’s big format retail property sector is accelerating. 

Colliers head of retail middle markets in Australia James Wilson says while REITs have backed off the big format retail sector it was proving the hero of retail for private equity.

Wilson says Colliers has transacted more than $180 million between May and July this year, a 66 per cent increase on the previous three months. He says rate rises are materially impacting certain sectors but buyers have rallied in the big format retail sector for its development upside and as an inflationary hedge. 

“There’s been $200 million in transactions in the last two months,” Wilson says.

“There’s a lot of transactions and there’s still a lot of capital yet to be deployed. The key thing to look at is where is the capital coming from and what type of assets is it looking for, there’s been a real flight to quality.

“They’re buying the best supermarkets, hardware, and neighbourhood shopping centres, which remained resilient assets during the pandemic and provide a good hedge against inflation.

“Secondary assets are affected more materially by the rate rises.”

Wilson says Bunnings has been a standout in the sector as a solid performer, as well as Dan Murphy’s and shopping centres with Coles or Woolworths as anchor tenants. 

▲ Transactions this year include the sale of Cameron Park Plaza in NSW for $60 million with a passing yield of 4.4 per cent.

It is a reflection of how the pandemic has impacted the retail sector with home improvement and essential services remaining resilient throughout the past few years. 

“The rate rises have made it harder for the REITS to buy, and institutional investors are looking to recycle their assets. Cashed-up private buyers have stepped into the market to take their place. 

“I think generally in the face of growing interest rates it will diminish your return, but there is good opportunity for income growth and strong land-value increases.”

Colliers has transacted on a number of retail properties since the second rate rise in June, all below 5 per cent passing yields.

Cameron Park Plaza, NSW, sold for $60 million with a passing yield of 4.4 per cent, Burleigh Home + Life, Queensland, sold for $72.5 million, fully leased on a 4.68 per cent yield, Central Park Duo, NSW, sold for $26.1 million, Yamanto Service Centre, Queensland, sold at $21 million, and Sydney metro, a Woolworth’s anchored shopping centre, changed hands for $30 million. 

Wilson says syndicates and private investors are looking to retail as a land bank for development opportunities with strong income potential in the medium term.

They are cashed-up generational investors who can absorb the interest rate rises over a longer term and are operating in a less competitive landscape without REITs in the market. But it is not clear at what point the REITs will re-enter in the current climate of rising interest rates and inflation.  

▲ Casuarina Square in Darwin: Sentinal Property Group this year paid $397 million for the asset. 

Wilson says while online shopping penetration continues to grow it has only impacted the middle markets retail property sector about 10 per cent.

He says most people still prefer to purchase convenience retail goods in-person, and supermarkets had adapted with click and collect shopping, and an enhanced in-person experience. 

The Australian Bureau of Statistics says household goods retailing dropped 0.3 per cent in June, but still turned over $6 billion, which made it the strongest performer in the retail sector.

Online retail in June 2022 was worth $3.5 billion.

MSCI Real Assets’ Australia Capital Trends report shows a cooling of the commercial market but head of Real Assets Research David Green-Morgan says there are some green shoots within the retail sector.

“Pockets of the retail sector have seen some robust demand but deal activity across the sector has dropped 28 per cent in the first half of the year,” Green-Morgan says. 

“Overseas investors have leaned much more to the office and industrial markets.”

According to MSCI Real Assets the retail sector recorded $6 billion in sales for the first half of 2022. Large format and neighbourhood centres remained the “preferred subtype”, but there has also been renewed interest in CBD retail and larger shopping centres. 

Casuarina Square in Darwin has been chalked up as the biggest retail deal of 2022 so far with Sentinal Property Group splashing $397 million on the asset. 

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Article originally posted at: https://www.theurbandeveloper.com/articles/private-equity-large-format-retail-australia