_Retail in favour with investors as market momentum strengthens

Retail is one of the sectors within Capital Markets that is performing strongly in 2024, with growing buyer demand that we believe will be sustained throughout the year.

There were fewer transactions in the retail market in 2023, with some buyers adopting a ‘wait and see’ approach given the economic conditions and interest rates rises. But since the start of this year we have seen a return to confidence, and with that has come a constant flow of transactions in the sector.

Investors who have previously ignored the retail sector - instead preferring to invest predominantly in the office market - are now amongst the buyers looking at retail more closely, identifying the positive fundamentals of this asset class.

Population growth will underpin demand in the retail sector

The cost of living has risen, but on the ground Knight Frank hasn’t seen this translate into a fall in overall consumer spending in the retail sector.

The cost of goods, and hence most retail items, stopped rising quickly after a big spike in 2021-22 and high inflation is now mostly driven by services such as insurance, healthcare, housing and utilities. Essentially, this means households are spending more on non-retail items, while price growth for retail goods has generally risen at a level below CPI.

We are therefore still seeing consumers consistently spending money at existing shopping centres, with retail sales proving to be quite resilient. While real disposable income has fallen, which can impact discretionary spending, this is expected to improve from here on, with tax cuts, rising wages and lower inflation all contributing to a return to growth in H2.

Even if consumers do cut back on spending, the growing population, coupled with a lack of new retail supply, around Australia will underpin retail sales, and this is largely where investor confidence in the sector is coming from. There is very solid demand for retail through the sheer number of consumers in Australia, which is growing all the time. Combine this with the limited number of shopping centres for them to spend their money at, and you have a solid investment case in the retail sector. We aren’t seeing any new shopping centres being built, largely due to the high cost of construction, so naturally retail sales, and therefore rents in existing shopping centres will grow as the surrounding population grows.

In turn this means that retailer demand for leasing space in shopping centres is strong, as little to no new development means the options for tenants are limited. As a result we are seeing very little vacancy in retail centres and rising rents. REITs are now consistently reporting positive lease spreads for new deals and renewals.

More buyers are looking to acquire assets

Major REITs have used the last 18 months to tidy up their balance sheets and reduce their gearing, and it’s now evident that their focus is turning back to acquisitions rather than divestments. They are now re-emerging to become active buyers again, and creating greater buyer competition that will drive values up moving forward.

During their absence from the acquisition market, we saw syndicators such as Fawkner, Haben & IP Generation take advantage of reduced competition, becoming more active in their acquisitions of larger sub regional and regional assets that were previously deemed out of reach.

We have also seen private investors remain active, competing for smaller assets such as neighbourhood shopping centres where they are willing to pay sharp yields of 5.5% to 5.75% for the right asset.

In fact, private groups – split between private individuals and syndicators - have been the main buyers of retail over the past 18 months while REITs have sat on the sidelines.

Buyers that have been decisive, and continue to be, in terms of acquisitions, will benefit in the future from value growth as demand in the asset class picks up, driving greater competition.

We are already seeing asset valuations stabilise, with several owners reporting their portfolio valuations have remained steady for the time being. 

Low-risk assets in strong population hubs are the most sought after

A large number of retail transactions this year have taken place in New South Wales and Western Australia, with the latter offering appealing cap rates, compared to the East coast. Investors are looking at everything from neighbourhood shopping centres to super regional shopping centres.

However, our enquiry levels indicate that there is currently strong demand for neighbourhood and subregional assets in major metropolitan Melbourne, Sydney and Brisbane.

These locations are lower risk, with strong population growth, and therefore a growing number of shoppers, underpinning demand for retail services.

If you have any questions or want to chat about the retail market, please get in touch with me at Campbell.aitken@au.knightfrank.com or 0488 200 739.