Retail Investment Landscape Dominated By Lack Of Supply

Lack of supply has been the leading feature of the retail investment market over the last financial year, according to the Annual Retail Investment Review by

Colliers International.

After reaching record levels in 2012/2013, the overall level of market activity decreased in 2013/2014 predominantly due to the lack of stock being offered to the market.

“Competition for quality retail assets is strong, particularly for core and core plus product, with the volume of capital seeking placement in the retail sector exceeding stock available,” said Lachlan MacGillivray, National Director, Retail Investment Services at Colliers International.

“Retail investment activity remains strong both historically and when compared to other property sectors.”

Colliers International recorded 126 major retail investment sales with a total value of $6.108 billion over the 2013/2014 financial year.

Trading activity over this time was very much a tale of two halves with strong volumes during the second half of 2013, where 62 per cent of all transactions for the year occurred, compared with the first half of 2014.

The latter period was characterised by minimal product on the market and a mismatch between demand and supply, leading to increased competition and further cap rate compression.

Strong demand in the sector is coming from a broad spectrum of investors ranging from super funds to REITS, private investors and syndicates.

Offshore investors purchased just under $1 billion worth of retail assets during the period.

While the retail sector has not been a major target for Chinese investors to-date, this is expected to increase in future as sovereign wealth funds, Chinese insurers and Japanese Pension Funds start to look more closely at Australia due to their increased freedom to invest in offshore real estate by regulators.

The 2013/2014 Financial Year saw neighbourhood centres dominate trading activity by volume. Both the quantity and value of centres sold increased notably reflecting strong interest from REITs, offshore investors and private investors.

The activity level in sub-regional centres was up significantly at $1.8 billion in 2013/2014 versus $1 billion for the previous period.

However, transaction volumes in the regional centres category was down significantly to only $742 million in 2013/2014, compared to $4 billion plus in the previous period.

“With record levels of capital chasing both regional and sub-regional assets, these results were driven by supply,” said Mr MacGillivray.

Large format retail is another standout asset which is seeing increasing demand, and over this 2013/2014 period the value of sales in this asset class doubled when compared to the previous year.

“Over $1.1billion worth of large format centres across 35 sales have traded in the last year,” said Mr MacGillivray.

“Given that 65 large format retail centres have been sold in the past two years, the availability of quality assets will be limited moving forward. Institutional investors exiting the sector have been the dominant vendors over the last 12 months as they came to view this asset class as non-core, but this trend is slowing. The majority of these centres have been purchased by private investors and syndicates.”

The hardware category continues to be the most active component within the large format retail sector, recording 23 transactions.

During 2013/2014, the Bunnings Warehouse Property Trust purchased 12 Bunnings Warehouse stores. Record low yields are being achieved for hardware centre assets - a new Bunnings store at Hastings in Victoria sold to a local syndicate of private investors for $15.16 million. The sale reflected a yield of 6.50 per cent , the lowest since the global financial crisis.

Improving household balance sheets driven by strong growth in house prices, combined with a weaker Australian Dollar which is curtailing some of the spending leakages to offshore online shopping and outbound tourism, are all good news for the retail sector.

Investors are seeing these improvements as strong performance indicators for the future of this asset class, and as such, demand continues to grow.

However further yield compression in the second half of 2014 is expected as a result of the growing demand for quality retail assets.