The popularity of retail property, always an attractive investment option, appears to have reached a new zenith.
According to research by Savills Australia, investors outlaid $9.76 billion on retail assets in the 12 months to June, topping the five-year average for the sector by nearly $3 billion, a rise of 40%. Savills says the figure also represents a 22% jump on the $7.96 billion in retail property sales recorded in the previous 12 months.
Recent Retail Property Deals
Major transactions in the period include the purchase by Blackstone from Vicinity Centres of Rundle Place and 80 Grenfell Street in the Adelaide CBD in December for $400 million, and a three-centre portfolio from Scentre Group for $655.5 million in August.
In May, Blackstone added to its portfolio Toowoomba’s Clifford Gardens, and the Forest Hill Chase and Brimbank centres in Victoria. Mirvac outlaid $223 million to acquire from Vicinity Centres Brisbane’s Toombul centre.
Vicinity, an entity created by the 2015 merger of Federation Centres and Novion Property Group, a few weeks ago put to market six assets with a $200 million book value – Maitland Hunter Mall, Hilton Plaza, Monier Village, Tweed Mall, Wodonga Plaza, and Albany Brooks Garden.
In July Sentinel Property Group, turned a tidy $7 million-plus profit on Jimboomba Junction, a Coles-anchored 20-tenancy facility with service station. Jimboomba Junction was bought for $20 million in 2014 and reportedly realised $27.48 million, with the deal struck on a fully leased yield of 7%.
Retail Property Market Trend Forecast
Savills’ national director retail investments, Steven Lerche, says sales in the sector reflect retail property’s safe-haven status in a market where bank rates are at historic lows and funds held by big, mid-size and small players alike are chasing yield. Mr Lerche forecasts intense competition for limited stock available to the market will see transactions occur at record low yields and the latest interest rate cut by the Reserve Bank will further fuel the fire.
So, where is the retail property market heading and are there possible implications for investors buying at low yields in a low interest rate environment? Let us now consider yield, which is a critical issue for property investors.
At what nadir does property cease to make sense as an investment?
Recent sales of large and mid-size properties have been occurring in the 7-8% yield range which, clearly, major companies and seasoned investors view as acceptable. However, smaller offerings – neighbourhood centres, retail strips and the like – are the stock in trade of private investors purchasing through family trusts, superannuation funds and sales in the sector have been occurring at low yields.
A prime example is that of a 14-tenancy single-storey offering at Nobby Beach, on the Gold Coast, which changed hands earlier this year at auction on a bid of $9 million, representing a 4.9% yield. Clearly, to realise tight yields, a number of factors must be in play. At the very least, a property must be at or near full occupancy, be in a well-trafficked location, be trading well and have reasonable unexpired periods of lease terms remaining.
However, given the low annual return, the purchase requires substantial borrowing timeframe for full return of capital outlay. How will interest rates move through this period? Is this investor category going to realise what they paid when they sell?
Such circumstances behove investors to give thought not only to location, occupancy and the level of custom, but also to one other factor: Does the property provide opportunity to value-add in the short- to medium-term?
Key to the issue are questions such as:
- What is the age of the property?
- When will it need refurbishment and at what cost?
- Does the site provide space for additional facilities?
- Does it provide opportunity for a new development with additional commercial or residential storeys?
- Could the precinct continue to trade while redevelopment occurs?
In an era where money on loan to financial institutions provides little return, the changing nature of the economy has created a volatile share market, and private investors are chasing limited opportunities, thoroughness becomes the staff upon which confidence depends.
We are looking for upside when making acquisitions in this environment and advising our clients accordingly.
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