Australia’s retail landscape remains positive despite ‘noise:’ Savills

Australia’s retail landscape remains positive despite ‘noise:’ Savills

14 June 2019

The future of Australia’s retail investment sector is positive, despite mounting noise suggesting otherwise, according to industry experts.

Savills Australia’s Ben Parkinson and Rick Silberman have responded to the prevalent negative commentary, saying that the existing demand for retail-grade investment property was as strong as they had seen.

Mr Silberman maintains a positive outlook, referring to various neighbourhood shopping centre transactions, including the recent sale of Coburg North Village on a yield of 4.74 per cent.

“Despite the consistent doom and gloom commentary regarding the retail landscape, much of the negative bias needs to be taken with a grain of salt,” he said.

“At the coalface, the demand for quality retail investment property is as strong as we can recall, as the fundamentals in most cases remain strong – land-rich assets and quality, reliable tenants with long, secure leases.”

Mr Silberman went on to say that the “retail naysayers” failed to consider the full retail context.

“Every retail asset needs to be assessed on a case by case basis,” he said.

“The retail investment market covers many subsects and is therefore much too broad to paint with the same brush.

“The demand for certain retail assets continues to be strong, which we do not see abating any time soon.

“We need to delve a little deeper to understand what works and what doesn’t – while some retail assets might be struggling due to overexposure to fashion and discount department stores, there are others that provide quality tenant mixes in ideal locations with non-discretionary offerings, and those that tick these boxes continue to be sought after and considered as secure retail investment opportunities.”

Mr Parkinson, Savills national head for Retail Investments, cited the recent RBA announcement, which cut interest rates to a record low of 1.25 per cent, and said this was likely to fuel more demand and activity.

“There is a significant amount of capital from privates and syndicates looking for a home,” he said.

“Their money isn’t doing much in the bank and retail investment provides sound returns for these investors.”

Mr Parkinson said he and Mr Silberman regularly spoke to buyers with a strong interest in securing neighbourhood shopping centres, standalone supermarkets and single-tenanted retail assets, which were widely considered to be the most tightly held assets across all commercial sectors.

“This area of retail remains a highly sought-after asset class that provides quality covenants and long leases,” he said.

“Quality retail investment assets offer a secure cash flow, high occupancy rates and, in most cases, are land-rich assets that are suitably zoned to offer future potential – three critical factors on most wish lists for commercial real estate investors.”

Mr Silberman said that the investment fundamentals of well-located sites with strong underlying land values and underpinned by top-20 ASX-listed covenants on long leases could not be overlooked.

“Investors are seeing huge opportunities in the current retail market, given the yield spread compared to other asset classes, and the attractive income returns available for quality retail assets,” he said.

“The difference between prime commercial and industrial yields and quality retail yields is simply too great to ignore.”

In related news, ASX-listed retail property group Vicinity Centres has revealed its substantial shopping-focused property portfolio has taken a financial hit.

Australia’s second largest listed mall landlord, led by Grant Kelley, estimates the value of its 66 centre-portfolio fell 1.3 per cent, or $202 million, in the six months to June this year, reports The Urban Developer.

Valuation declines in Western Australia contributed to more than half of Vicinity’s estimated portfolio valuation loss, with a $130 million or 6.7 per cent decline.

“Current challenging operating conditions in Western Australia, compounded by an increased competitive environment, has resulted in lower income forecasts and some softening in capitalisation rates for our assets in this state,” Vicinity Centres chief executive Grant Kelley said.

To counteract this, Vicinity has been refining its portfolio to focus on larger, destination centres by divesting smaller malls.

So far Vicinity has sold down $2.7 billion of retail assets and has another $1.2 billion poised for divestment.