Opportunities in Australian retail as market shifts

As listed retail funds progress their divestment plans and rationalise their portfolios, opportunistic investors are taking advantage of the changing market.

February 12, 2019

Unlisted funds have dominated retail acquisitions over the past five years, pouring A$4.6 billion into the sector. But this is set to change in 2019 as institutions focus on smaller, more refined portfolios to bolster returns.

“Large, listed funds will progress their divestment plans in 2018 to focus on smaller and more refined retail portfolios given the need to manage assets more intensely and invest more capital into them,” says Simon Rooney JLL’s Head of Retail Investments, Australasia.

Meanwhile, investors with more opportunistic mandates are taking advantage of the changing conditions in the sector.

Private investors, on the other hand, will be attracted to the relative value of yields as well as a strong long-term outlook for consumer spending, given the largest cohort of the population - aged 38 to 43 - will be reaching their peak earning and spending age in the next 10 years, says Rooney.

 “These factors will prompt multi-sector investors to re-evaluate retail opportunities in 2019, particularly if retail spending growth improves.”

Average yields for sub-regional retail assets were 6.29 percent as of the fourth quarter of 2018 and 6.20 percent for neighbourhood retail, according to JLL research. This compares to the average prime CBD office yield of 5.61 percent and prime industrial yield of 5.73 percent.

Retail assets that privatised in 2018 include the Waverley Gardens shopping centre in Mulgrave in Melbourne, sold by Blackstone to Elanor Investors Group for A$178 million and Brandon Park Shopping Centre in Wheelers Hill in Melbourne, sold to Newmark Capital – a syndicate fund owned by former Hawthorn AFL player Chris Langford for A$135 million by joint owners Telstra Super and Vicinity Centres. The prudent approach by listed funds comes as reporting season begins, with some owners having already reported downward pressure of valuations.

Cautious investor sentiment will be reflected in pricing over 2019 as capital values adjust to reflect pressure on rental income in many centres, says JLL’s Head of Retail Valuations and Advisory John Burdekin.

“The market has reached an inflection point where some assets are now selling for below book value.”

Despite headwinds, 2018 was a strong year for shopping centre transactions, with A$8.1 billion in deals making it the third highest volume on record.

Listed funds made selective acquisitions in 2018, with key deals including Scentre Group’s purchase of a 50 percent stake in Westfield Eastgardens in Sydney for A$720 million