Highlighting renewed confidence in the retail property sector, this year has seen increasing buyer demand for convenience and sub-regional centres. Nine sub-regional centres have sold in the past seven months for a combined value of $660 million and they are now achieving yields in the mid 7 per cent range, or in some instances even lower. A further 26 neighbourhood centres have sold for a combined $500 million and there have been sales totalling $80 million in freestanding supermarket and liquor store sales.  

Interestingly, there have been no bulky goods centres traded this year, however new evidence of rumoured sales will show a similar yield tightening. 

Retail is essentially a defensive asset class. Investors have always had it on their radar, but the GFC hit the retail property market hard, alongside other issues like the growth in online sales and low consumer confidence.  

After the GFC, sub-regional shopping centres were pushed by institutional investors as their discretionary specialty tenants made them seem a riskier asset class than neighbourhood convenience centres. 

Retail fighting back 

From 2008 onwards, we saw a lot of private investors picking up property that they would’ve never previously had the opportunity to buy because their owners – mainly property trusts and funds – simply wouldn’t have sold them. 

This cycle has now reversed and we’re seeing renewed interest in retail as an investment. Over the past 18 months to two years, we’ve slowly emerged from the doldrums of the GFC. The market has firmed and we’re now back into close-to-record yields, a low interest rates environment and increased consumer confidence. There is a renewed perception that retail was never that bad. Now it’s back to where it should have been with strong interest across all retail sectors.

A lot of private investors believe the market has firmed to a level where they can realise some good capital value out of their assets, and the larger trusts and funds are back and trying to purchase in order to stock up their war chests. 

Strong sub-regional sales

For example, Savills has just sold Deepwater Plaza, a sub-regional shopping centre in Woy Woy, after an off-market offers to purchase campaign on behalf of a private investor. It sold for $98.5 million to Dexus Wholesale Property Fund, providing new evidence that the market is now content with yields of less than 7 per cent.

Deepwater Plaza pulls from a large catchment and is anchored by big-name tenants like Coles and IGA supermarkets. It also has a Kmart and Best & Less, alongside over 50 specialty shops. 

The broad interest in Deepwater Plaza and the price paid reflect the increasing demand for non-discretionary food anchored shopping centres, convenience and service retailing, alongside the appeal of a retail property in a popular, growing, tourist and residential destination. But it also shows the continuing high level of demand in the sub-regional market, which includes shopping centres between 10,000 and 30,000 square metres, after a strong year in 2013. 

Most sub-regional assets are convenience or service-based centres, which means that on the whole they have not been as affected as other retail categories by the cyclical or structural issues affecting the retail market (such as changes in consumer spending patterns and rising rents). Prospective investors are drawn by the ability to capture income and value growth while also gaining exposure in the retail property sector. 

But how an individual centre performs depends on its location, its position in the market and its convenience, with factors such as car parking playing an important role.

A seller’s market

The neighbourhood and sub-regional retail market is essentially a seller’s one. There’s a lot of money in the market chasing stock, and there’s very little stock available. So when stock does hit the market it is being snapped up very quickly by new entrances into the market and the larger well known trusts and funds.

A lot of trusts and funds have very specific criteria, often around property size or dollar figures. However, the lack of stock means they can’t be so picky. They can only buy what’s available. This means prices are sharpening and will continue to sharpen. Meanwhile, yields will continue to tighten due to the weight of money coming into the market and the increased interest in retail investment as an asset class.

That said, yields are not yet quite as sharp as they were pre-GFC. However, the quantum of deals in terms of total sales is similar to the 2006-07 period. Sub-regional centre yields have tightened about 150 basis points in the last 12 months and it is likely the sale of the Lend Lease portfolio will reset capitalisation rates again before the end of the year, before levelling out early next year. Neighbourhood centres also show similar trends. 

While the structural issues facing retail – like the ageing population and the rise of internet retailing – are challenging, they are not insurmountable. Savills expects that, as new business models establish themselves, the retail sector will evolve to take advantage of the structural issues, rather than being overrun by them. 

We’re optimistic about the short- to medium-term outlook. And I think we will see a continued price adjustment for the next nine to 18 months as institutional investors continue to purchase, and some private investors cash in on the stronger market.