[+] Demand to Outstrip Supply as Retail Hype Continues

Investor demand will outstrip supply of existing and new-build retail assets after a bumper year, highlighting a major opportunity for developers. Reports from Colliers this month highlighted continued investor interest in the retail space after a year of resilient sales, with total volumes reaching $6.28 billion last year. According to Colliers director of national retail research Nik Potter, while this was a decrease of 4.3 per cent compared to 2022, it was a far better performance than other commercial asset classes. “Retail in Australia has retained strong occupancy levels with pockets of rental growth and retail spending has been relatively persistent throughout the year,” he says. “Over the next 10 years, however, we need 2.25 million square metres of additional floor space to not even grow, just maintain our current levels of floorspace per capita. “That’s brought a lot of interest from new investors.” However, as Charbel Hazzouri, the managing director of Sydney retail and commercial developers Revelop says, there are big challenges to reaching this target. “Due to ridiculously high construction costs, high interest rates, and loosening cap rates, many projects will not get out of the ground, further reducing supply of quality retail assets,” Hazzouri says. The average price of the 98 assets sold last year rose to $64 million, up from $53 million in 2022, according to Colliers, but still well below the 10-year average of 140 deals annually, marking an opportunity and a challenge for developers. ▲ Revelop expanded its retail portfolio in February 2023, acquiring a 100 per cent stake in Stanhope Village from Mirvac for $158 million. Opportunistic investors Colliers 2024 Retail Investment Review suggested that counter-cyclical investors had taken advantage of robust retail performances and fund and syndicate investors contributed to 38 per cent of all retail transactions. “The increased amount of resilient private capital investment into the retail sector can be partially attributed to the longer-term generational view this purchaser category take when reviewing investment opportunities, allowing them to look through the current interest rate cycle,” Colliers’ James Wilson says. ▲ Nik Potter and James Wilson of Colliers' retail team. “The retail asset class offers varying investment drivers, which can impact the reported yields, with investors attributing value to the tenancy profile, income growth and underlying land value given sites’ mixed-use development potential.” Institutional investors have traditionally been the largest players in the market, making up 54 per cent of retail asset buyers in 2022. But in 2023 this plummeted to 14 per cent, with insitutional investors taking a ‘wait and see’ approach, Colliers’ Nik Potter says. “With interest rate rises and macroeconomic uncertainty, a lot of groups have bedded down but private buyers are paying cash and have large sums of capital and diverse capital sources,” he says. “They saw a good opportunity to buy strong stable investments with good tenants, saw that opportunity and took that.” But the issues facing retail are the same as those facing the rest of the industry, as the pipeline for new development dries up. “The retail developers in the current cycle are Coles and Woolworths , and they are having to deliver their own product given the headwinds in the construction sector,” Potter says. Shopping trends Central business district retail remained strong with a handful of major deals, including Brisbane’s Queen Street Mall, which sold last October for $145 million and the $56-million sale of Mitchell House and Milledge in Melbourne’s CBD that fetched $56 million at the end of 2023. Regional centres resurfaced as the predominant asset, marking their return to prominence, with $2.27 billion transacted in 2023, in contrast to “sluggish” activity in 2022. While transaction volumes were still slow compared to historic levels, the neighbourhood subsector attracted private investors who were less dependent on debt finance and preferring a resilient asset. “We see metro neighbourhood centres with a high proportion of non-discretionary spend will be the favoured asset class due to their ability to weather the storm of higher cost of living pressures negatively impacting discretionary spend sectors over the next two to three years,” Revelop’s Charbel Hazzouri says. However, regional assets were by far the largest growth area last year. ▲ Last year Colliers recorded $2.3 billion in regional asset sales up from $280 million in 2022. “We saw 1.1 per cent growth in neighbourhood retail centres, training upward for three years on the back of the pandemic,” Nik Potter says. “During that whole lockdown, with limited ability to travel, local neighbourhood centres have grown on the back of a more engaged local catchment. Now, with hybrid work, that has dripped local spending to local assets.” That’s not to say all retail is alike. With recent data from the Australian Bureau of Statistics suggesting that there was a 2.7 per cent decline in retail spend between November and December last year, added to the potential for further interest rate rises, the type of retail in which capital is invested is important. “In the short term, discretionary spending will inevitably be down,” Hazzouri says. “Non-discretionary spend will be stable and really underpin local shopping centre activity. One should be cautious about any asset class that falls outside the essential spend category unless you have a very long term view.” ▲ Cousins and founders of Revelop, Anthony El-Hazouri and Charbel Hazzouri. Potter agrees, saying that contextualising these trends is key, with holiday spending moving to November as a result of Black Friday sales and budgeting by savvy shoppers. “There’s a real benefit for the retail sector to capitalise on this, providing an opportunity to reshape and manage our assets, looking for other promotions and activations to leverage this change,” Potter says. Retail outlook The outlook for retail, despite these smaller headwinds, is bright, as populations grow. “There is a flow-through of more people coming into this country to embolden and give that growth to these assets,” Nik Potter says. “Looking at retail spending on per-capita basis, people are spending less per person but that overall population growth is propping up retail. “Investors and asset owners might see efficiencies in management or operations, invest in refurbishments or leverage leasing strategies in larger assets. “Some traditional assets are being sold, which might not have the leisure and entertainment spaces, and all of these are huge opportunities to capitalise on your assets and drive footfall. “That’s why a lot of retail investors are looking at Australian retail because there is that growth story and the upside.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Demand to Outstrip Supply as Retail Hype Continues

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