[+] Supermarket Giants Jockey for Position in Development Showdown

It was 2017 and to the untrained eye, supermarket giant Coles clearly had a problem. Its Richmond Plaza shopping centre, a sprawling hectare of rabbit warren-like retail spaces—of which it was the anchor tenant—was old, tired and dilapidated. A small car park at the rear was corrugated and rutted. Only part of it was covered. While Richmond’s 24-hour police station was just cross the road, the Church Street-Bridge Road corner that was home to the shopping centre was not always a safe place to be after dark. Six years on and the same untrained eye wouldn’t recognise any of it—the corner, the shopping centre and all that is in it, around it and above it. Known today as Richmond Traders, the 10,000sq m of retail space has a bustling café, a free-range butcher, delicatessen, bakery, pharmacy, specialist wine store, beauty salon and a couple of well-patronised restaurants. And, of course, a large Coles supermarket. In a select, off-market expressions-of-interest campaign, Coles sold the site early in 2019—complete with development approval for more than 300 apartments—to build-to-rent developer and operator HOME for a reported $50 million. Under the deal Coles is leasing back space in what is described as a “decades-long agreement”. And HOME, backed by the Singapore sovereign wealth fund GIC, quickly announced the residential component would now be build-to-rent apartments—365 apartments in four distinct buildings rising above the retail element and another 3000sq m of office space. Meanwhile, about 7km due south of the Richmond Traders centre, Woolworths supermarkets’ property arm Fabcot is about to ink a deal that will see it off-load a 5640sq m site in Elsternwick and take on a development partner. ▲ Richmond Traders has 10,000sq m of retail space including a full-line Coles. Like Coles in Richmond, Woolworths’ deal comes with development approval for a mixed-use project, including a full-line supermarket and 139 apartments designed by Fender Katsalidis. And like Coles, Woolworths is offering a 10-year lease, with options to renew. Stonebridge Property Group, which is brokering the deal, will only say the 11th-hour negotiations are at a critical stage. The two publicly traded supermarket giants have always been fiercely competitive—Woolworths is the 13th biggest company in Australia by market capitalisation and Coles the 19th—but now they’ve taken the fight from the shopping aisles to the development game. More engaged “Supermarkets have played in this development space, intermittently, over the years but more recently they seem to be more directly engaged,” says Robert Papaleo, Colliers national director for build-to-rent. “They became engaged after the Global Financial Crisis when they just needed to keep plugging the holes in their networks to keep the competitors away, or to capture as much expenditure and trade as they could. “And post-GFC, while there was a liquidity crisis, these were pretty solid businesses,” Papaleo says. “So they had the ability to participate in the market directly, where they were securing opportunity sites. “And they were underpinning the development through their leasing.” Papaelo points to an 8156sq m property Woolworths acquired in North Melbourne during the commercial property downturn in 2010. The country’s biggest supermarket chain is understood to have paid about $17 million for the land, which has frontages to Macaulay Road, and Canning and Vaughan streets, before obtaining a permit for two residential towers of 10 and 16 storeys for 304 apartments. ▲ in Glen Iris, Time and Place has teamed with Woolworths to pay $29.25 million for a 4306sq m site for its mixed-use project. Woolworths sold the development approved site, 2.5km from the centre of Melbourne, in 2015. With a 20-year lease on a ground-floor supermarket. “They took on a lot more planning risk than they might now,” says Papaleo. “And there were other examples of that at the time. They ultimately sold the sites with that pre-lease and with a permit in place that allowed them to roll out more stores.” Build-to-rent advantage HOME Apartments beat out at least nine other groups for the right to acquire the former Richmond Plaza shopping centre and officially opened the mixed-use development just 22 months later. It’s one of the advantages for the supermarket chains when dealing with build-to-rent developers, according to HOME’s director Christian Grahame. “Because build-to-rent mixed-use isn’t subject to apartment pre-sales we could demolish the existing dilapidated centre and agree on a guaranteed opening date,” he says. “So they can be confident that they could close the store, and then reopen it within a guaranteed timeframe.” Grahame says HOME had been watching the key Richmond supermarket site for many years. Coles had owned it for about a decade. “We had identified it prior to this process as a prime site for build-to-rent, but the ability to be able to develop the mixed-use centre in one line, without pre-sales and without needing to stage the development was really what won out for us.” ▲ The lobby of Richmond Traders in Melbourne. Neither Coles nor Woolworths would answer questions from The Urban Developer on the advantages of taking long-term leases on sites versus retaining them as property assets, or about their property development strategies. However, in its most recent annual general report, Woolworths said “most supermarket locations are situated within leased shopping centres”. It is a formula followed by rival Coles—securing prime sites they want, primarily for their ground-floor retail potential. Both have profited by on-selling Melbourne properties, often after adding value by obtaining permits to add residential components, like build-to-rent. Model evolving “I think it’s just an evolution in that model, by joint venturing, they’ve got a bigger say in the timing of these assets,” says Papaleo. “And they can, I suppose, defray some of their risks along the way as well. “It’s something that I think has now become structural and will remain a feature of the market.” Grahame agrees. “Sometimes these groups will control sites, or they’ll have a desired catchment,” he said. “And sometimes it’s us that’s identified a site and we think there’s a benefit to a supermarket going in.” Such was the case in Glen Iris, where in December 2020 developer Time and Place teamed with Woolworths to pay $29.25 million for a 4306sq m site, including a two-storey office building. Carr Architecture’s plans for the site, about 10km south-west of Melbourne, include a five-storey residential development above a full-line, Woolworths supermarket and adjoining BWS liquor store at street level. It’s scheduled to be completed next year. Like the build-to-rent sector itself, Grahame says the supermarket chains’ strategy was born in both the United Kingdom and the United States. ▲ Woolwich Central in south-east London is the largest “Tesco town” so far—the £250-million development features an 7803 sq m Tesco store, Europe’s largest, with a 259-home community above it. “When you think about groups like Tesco and others in the UK, they have essentially gone and identified the locations they want, secured the sites and then sought to package developments, then they’ll work with developers to have them delivered. “And I think one of the reasons you see it happening more and more here is just the scarcity of prime sites in inner city locations across Australia.” In answer to written questions, a Coles spokesperson said they would continue to focus on property developments where there are good retail, supermarket outcomes. “We do some development partnerships and have delivered within mixed-use spaces, which is generally inner metropolitan areas and includes apartments, offices, medical centres,” the spokesperson said. Increasing densification For its part, Woolworths said Australian cities and urban areas were increasingly densifying. “It’s important new developments speak to these trends and deliver sustainable outcomes that increase liveability for these communities,” a spokesperson said. “Our mixed-use developments are an example of responding to the changes we are seeing in our cities and the urban lifestyle people are demanding. Our developments mix quality apartment living with key services, supermarket retail and community infrastructure. “The retail and residential elements together drive a balanced, quality outcome.” And while the supermarkets won’t say it, shopping habits are changing radically as online sales grab a larger chunk of consumer spending. Fuelled by shifts in retail habits during Covid lockdowns, Australia’s online sales are now forecast to reach 17 per cent of all retail spending by 2026 , according to research by CBRE. ▲ The laneway at Richmond Traders. Shoppers of the future will demand convenience. “Each development aims to ensure people can shop, work and enjoy themselves all within a close proximity to where they live,” Woolworths says. “We have a number of mixed-use projects located across Australia, where we have worked with communities and local councils to unlock opportunities for good urban infill development.” And that is likely to increasingly include a captive clientele. In a residential component, not just nearby, but preferably on top. “Oh, absolutely,” says Grahame. “We’re constantly looking for locations that we think would suit a build-to-rent-led, mixed-use development. And we’re in discussions with all supermarket groups, including Coles, about new opportunities.” The ongoing challenge, he says, is in fitting a full-line supermarket in inner-city Melbourne or Sydney. “So it depends who’s in a given catchment. What size format works for them and in what location. “So yeah, it could be any of the supermarket groups, including the independents.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Supermarket Giants Jockey for Position in Development Showdown

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