This article is from the Australian Property Journal archive
THE retail property investment and development markets have reached fever pitch, according to the UrbisJHD Shopping Centre Investment Review.
The UrbisJHD report said it is confounded by the latest deals with low yield, high rent and impossible timelines that some acquisition and development managers are pricing in to their projects.
This is only comforted that interest rates are stable, the RBA has inflation in check and that the pool of funds from compulsory superannuation around the market looking for a home.
The report noted on market investment activity in regional and sub-regional centres remains slow in the first half of 2007, whilst neighbourhood centres were in high demand, selling at sub 7% yields with internal rates of return entrenched in the 8% bracket.
The most significant transaction in the regional category was Westfield’s sale of a 50% interest in Westfield Parramatta to GIC Real Estate. The shopping centre sold off an initial yield of 5.0% and an estimated IRR of 7.5%.
In the sub-regional and neighbourhood centres categories, Lend Lease led with the purchase of Pakenham Place in Victoria for $60.5 million. UrbisJHD estimated the transaction’s equated yield of circa 6.12% and an IRR of around 8.42%.
The report considers that the purchase price is in line with market trends, however there is considerable future competition risk from neighbouring retail developments and the relatively confined trade area.
Macarthur Cook also continued their expansion with the purchase of the leasehold interest of Kogarah Town Centre in NSW for $26.21 million. The transaction reflected at initial yield of 6.77% and the significantly higher equated yield of circa 7.5%. UrbisJHD’s analysis shows an IRR of 9.8%.
“We consider that there will be ongoing opportunities in 2007 and beyond for the lesser run sub regionals and neighbourhood centres to be repositioned and enhanced, shifting the focus away from yield compression to income uplift to drive investment returns,” the report said.
There was only one CBD central transaction and that was in Centro buying the City Central Shopping Centre in the Perth CBD for $71.3 million. UrbisJHD indicated an initial yield of circa 6% with an equivalent yield of circa 6.2% and an IRR of 8.48%.
“Centro have quoted slightly higher hurdle rates on the expectation of an immediate increase in casual mall leasing and reduced outgoings. The sale continues the trend of low yields for CBD located centres,” the report said.
The UrbisJHD report did not record the Industry Superannuation Property Trust’s purchase of Midtown Plaza in Melbourne’s CBD for approximately $60 million as reported on Australian Property Journal in May this year.
UrbisJHD notes the continued confidence in CBD retailing bodes well for the pending sale and redevelopment of the Myer Department store in Melbourne.
“We expect that the result will reflect significantly lower hurdle rates than the other recent CBD transactions and could see the redevelopment priced off a yield in the low 5% range,” the report added.
In the bulky good sector, ISPT was again active in buying the Harvey Norman Centre in Alexandria, NSW for $53.5 million in the second half of 2006.
The acquisition represents a strategic move by ISPT to secure a major investment with secure lease profile and long term capital growth prospects.
UrbisJHD indicates an equivalent yield of 6.2% and an IRR of 8.59% with rental growth primarily driven through fixed rental increases.
Meanwhile, GPT sold the Epping Homemaker Centre in Victoria for $38.1 million in September last year. Our analysis indicates an equivalent yield of circa 7.25% and an IRR of approximately 9%.
UrbisJHD asked, “…have we reached a point of no return, is the downturn just over the horizon and are we missing the danger signs that should be warning us off?”
“Looking to the past however may provide little guidance as to the future as the current boom is in our view more related to a structural shift in the Australian and global economies rather than the over zealous investment in development of the late 80s.
“It is noted that while many in the property investment arena hold similar views on the short- to mid-term prospects of the market, we should all remember that ‘market confidence’ can be as big a determinant of future returns as inflation, interest rates and consumer spending,” the report said.
Looking ahead, the report said all other factors remain constant and it forecasts continued low yields, potentially slightly more yield compression and reasonably sustainable income growth.
“The impending doom of last years spike in CPI figures which led to three interest rate increases from the Reserve Bank of Australia has subsided.
“The consensus for inflation and interest rates has now moderated, as a result and we anticipate relatively stable consumer spending over the next 12 to 18 months,” the report concluded.
Australian Property Journal
