After years on the discount rack, bricks-and-mortar retail property has become an investor favourite once again thanks to scarce new supply and higher consumer spending.
Australian retail property transaction volumes reached $7.1 billion during the first half of this year, up 12% year-on-year, according to MSCI.
Retail bucked the broader trend, with total commercial property deal activity retreating 7% during the same period.
Investors have splashed some serious cash on retail this year, including the JY Group’s $670 million acquisition of Westfield Marion in Adelaide and Vicinity Centres’ $212 million purchase of Uptown in Brisbane.
JY Group bought a half stake in Westfield Marion for $670m. Picture: Supplied
Confidence in bricks-and-mortar retail, once hit by the rise of online shopping, is rebounding as population growth outpaces new retail development, which has been hindered by high construction costs.
Household spending continues to rise nationwide too, increasing 1.1% during July and jumping 7% compared to a year prior, according to the latest figures from the Australian Bureau of Statistics.
John Nockles, commercial real estate agent and director – agency at CVA Property Consultants, said confidence had returned to the sector, with more buyers competing for prime assets.
“Retail has been one of the stronger performing commercial property sectors over the past six months,” he said.
John Nockles of CVA Property Consultants. Picture: Supplied
“The biggest change over the past six months is definitely confidence. Buyers who were retail property investors pre-Covid shifted straight into industrial because of the known narratives around retail, but now they appear more comfortable that the interest rate cycle is stabilising and they are looking beyond today’s cost of debt.”
Mr Nockles said more bidders were competing for the same quality assets, which was supporting prices and putting downward pressure on yields.
“There is a real flight-to-quality story happening, with prime assets continuing to outperform secondary stock,” he said.
“But I wouldn’t be painting all retail with the same brush and saying it’s all flying because there are sections that are very hard to move.”
Vicinity Centres has taken full ownership of Uptown Brisbane. Picture: Supplied
That renewed confidence is being echoed in the debt markets, with finance brokers saying that banks and other lenders were warming to well‑located retail centres.
Jean-Pierre Gortan, managing director at commercial finance broker Simplicity Loans, said lenders and investors were returning due to rising rents and strengthening tenant demand.
“Retail was a very unloved part of the market, with even the banks pulling back,” he said.
“It’s been pretty subdued for quite a long time, and as a result rents have now caught up, which makes it an attractive asset class again.
Simplicity’s Jean-Pierre Gortan. Picture: Supplied
“For a well‑positioned property, whether it’s a high‑street location or a suburban centre, there’s good demand from tenants, which is giving lenders more confidence.”
Yet the rebound comes with caveats.
Anne Flaherty, senior economist at realcommercial.com.au, said the biggest risks that retail investors faced at the moment were tenant failure and rising interest rates.
While household spending continues to rise, Ms Flaherty said cost of living pressures were contributing to Australians cutting back on spending, creating a growing risk for some businesses operating in the discretionary retail space.
Realcommercial.com.au’s Anne Flaherty. Picture: Supplied
“For investor borrowing, higher interest rates can also be a challenge,” Ms Flaherty said.
She said expectations of further interest rate rises had increased recently, which could put pressure on yields and reduce capital values.
“Location is also key when assessing risk and investors should consider the underlying factors driving foot traffic near a particular asset,” Ms Flaherty said.