This article is from the Australian Property Journal archive
INVESTORS reweighing their portfolios in a competitive and evolving retail environment have driven transaction activity in 2017 to top $8.8 billion, the second highest level on record, according to JLL.
JLL’s annual Shopping Centre Investment Review and Outlook 2018 predicts the trend will continue in the year ahead as investors adjust their exposure to different states and asset types and seek greater diversification to improve their long-term risk-return profile.
It was a year of major transactions, the highest volume of transactions above $300 million on record totalling $3.3 billion, with the five largest deals accounting for approximately 40% of total volumes, as owners take advantage of market liquidity.
The biggest deal was the Vicinity Centres/GIC asset swap for $1.1 billion; followed by a 50% share in Indooroopilly Shopping Centre in Brisbane for approximately $800 million – the biggest retail single asset sale on record; a 25% share in Highpoint shopping centre in Melbourne for $680 million; Home Hub Castle Hill and Home Hub Marsden Park for $436 million – the biggest Large Format Retail sale on record; and a 50% share in Rockingham shopping centre in WA for approximately $305 million.
Unlisted funds were the dominant source of capital and dominated the scene by a significant margin, acquiring $3 billion or 34% of total transactions.
It was followed by AREITs, albeit on both sides of the buy-sell equation, but were net buyers in 2017 after having been a net seller of assets in the five years prior.
AMP Capital was the biggest buyer of retail assets in 2017, acquiring approximately $1.5 billion (excluding Gasworks Plaza). However, Vicinity Centres was the most active group during 2017, completing approximately $1.9 billion in transactions (including divestments and acquisitions).
Across the country:
- New South Wales recorded $3.4 billion in deals – the highest ever recorded for the state.
- Queensland recorded approximately $2.5 billion, up from $2.4 billion in 2016.
- Victoria recorded a decline from $1.9 billion to $1.5 billion due to a tightly held market.
- ACT transactions in 2017 fell by more than half from around $500 million in 2016.
- Western Australia gained renewed investor interest with $633.4 million worth of deals, up from around $500 million last year.
- South Australia has not recorded transactions over $50 million in the last two years.
JLL Australasia head of retail investments Simon Rooney said a gap is also widening between individual retailers and between the performance of prime and secondary grade retail assets, which has resulted in investors becoming increasingly selective and cautious in terms of shopping centre performance.
“Investors clearly have a diversity of views on the outlook for the Australian retail sector, which stimulated near-record levels of asset trading for shopping centres in 2017.
“Given the compression in yields over the last few years and the increasing reliance on income growth as a driver of returns, asset selection will be key in 2018.
“Opportunities for high-yield investors are emerging in 2018given the increasingly diverse underlying performance of centres, particularly in the sub-regional shopping centre sector,” he added.
Rooney expects high quality retail assets to remain resilient, delivering attractive returns and therefore are continuing to be highly sought after by investors.
“Experienced and active asset management will be key to extracting value and delivering outperformance in this competitive retail environment, which is supportive of the ongoing trend towards joint ventures.
“Owners have been undertaking strategic portfolio restructuring in the last few years to re-position their businesses for growth. While a lot of these strategic manoeuvres are now largely in place, for most groups, we still see the need for ongoing tactical adjustments to retail portfolios (sales and acquisitions) to maximize portfolio returns,” he continued.
JLL’s director of retail research Andrew Quillfeldt said increasing divergence in the sector is creating risks and opportunities for owners.
“While e-commerce is weighing on shopping centre sales growth, some of the cyclical drivers of retail spending are showing more positive signs of a recovery in the short-term. Lower quality retail assets have been most affected by changes in the retail industry, but quality retail assets are continuing to perform well.
“The retail sector is going through a period of adjustment as retailers continue to revise their business models to reflect the globalisation of retail, changes in technology, changing consumer preferences and trends between generations.
“Retailers are rationalizing their store networks and/or relocating to better performing centres with a stronger trading profile or more dominant position within their catchment.
“Shopping centre owners will continue to leverage technology as an opportunity, find new ways to adapt the physical retail environment to the latest consumer trends and engage with new and innovative retailers,” Quillfeldt said.
Meanwhile JLL found offshore investment was down by 46% in 2017 to $1.4 billion from $2.5 billion in 2016. Despite the decline, volumes were in line with the 10-year average in percentage terms, with offshore investors accounting for 16% of total sales in 2017.
Rooney said while there continues to be significant demand from overseas institutional investors for Australian retail assets, the focus is on prime quality, core and core-plus opportunities.
“Although direct acquisitions by offshore investors declined in 2017, offshore investors contributed strongly to activity by investing indirectly into domestically-managed wholesale funds,” he added.
Rooney said yields are starting to adjust.
“The divergence theme is starting to be reflected in pricing. The first signs of yield decompression in this cycle have emerged. JLL recorded softening at the lower end of the yield range in 4Q17, yet continued to record further compression at the upper end of the yield range for prime assets in certain sub-sectors. We expect this trend to extend to other markets across multiple sub-sectors from early 2018.
“While retail market conditions vary within each sub-sector, CBD retail is posed to outperform – particularly in Sydney and Melbourne. Retail market fundamentals are expected to be relatively stable in 2018.” Rooney concluded.
Australian Property Journal
