RETAIL property investment levels are expected to remain steady throughout 2019 following a strong five-year period, as shifting market and industry fundamentals remain conducive to transactional activity.
JLL research has recorded $7.1 billion in sales volumes this year to December 4, below last year’s peak of $8.9 billion but well above the decade average of $5.8 billion. These were headlined by Scentre Group’s acquisition of a 50% interest in Westfield Eastgardens for $720 million, and the Vicinity Centres portfolio acquisition by SCA Property Group for $573 million.
“We expect retail investment activity in 2019 to be at a similar level to this year, even though such a high volume of stock has traded in the last few years,” JLL’s Simon Rooney said. “In terms of the pipeline of activity for 2019, there are a number of major assets being offered for sale at present, formally and informally, which will drive activity next year.”
He said there is still strong motivation among many existing owners to continue to refine their portfolios to focus their attention, capital and resources into a smaller number of assets to extract higher returns. REITs are tipped to be the main driver of this trend, but it is likely a diversified set of vendors will emerge through 2019.
Rooney said the opportunity for investors in 2019 would be to acquire retail assets at attractive pricing, extract value through change-of-use opportunities and deploy capital and intensive asset management to drive leasing outcomes and reduce risk.
He highlighted three key drivers of investment activity in 2019.
“Firstly, vendor expectations have eased for non-core assets. Buyers have become more cautious and are factoring in more conservative assumptions. Owners are likely to meet the market in order to execute on their strategic investment decisions and extract value from other assets in their portfolio.
“Secondly, the outlook for retail fundamentals is improving. The labour market remains strong and the prospect of a wage growth rebound is strengthening, which will be the catalyst for a rebound in discretionary retail spending categories. This is expected to offset the impact of cooling house prices and volatility in equity markets that have led to a deterioration in the wealth effect and dampened consumer confidence.
“Finally, retail offers relative value given the attractive yields compared with other asset classes, which have continued to shift lower,” Rooney said.
Buyer demand and pricing for major core retail assets is forecast to continue being supported by institutional capital seeking exposure to this style of retail product.
“Retail centres that have sustainable long-term income growth potential and have defensive characteristics will be highly sought after by domestic and foreign capital sources.”
A recent m3property report recently suggested innovative landlords will still be able to capitalise on opportunities in the retail property sector.
It also analysed the long-term performance of the retail, commercial and industrial property sectors over 10 years, and found retail has the highest average return and lowest risk of the three sectors, and is the only sector within the optimal investment segment, offering low risk and high return prospects.
Average returns as part of the five-year outlook are of 7.5% for retail, ahead of 6.9% for office and near the 8.1% for industrial, while the risk factor for retail of 0.1% is more attractive than both the office and industrial sectors with 1.3% and 1.0% respectively.
m3property considers leasing risk to be lower for retail property due to the relatively large number of tenancies within a centre, diversifying expiry risk, while number of tenants also allows landlords to more quickly adjust to changing market conditions.
BIS Oxford Economics head of property, Dr Frank Gelber, said that while expected total returns to retail operations that successfully navigate the impending structural changes remain solid despite softening yields, some retail centres will struggle.
“The risk plays out as a property risk rather than a market risk.”
According to JLL, domestic unlisted funds were again the dominant buyer group in 2018 with a continued focus on regional and, to a lesser extent, major sub-regional assets.
REITs were the second largest buyer category, underpinned by the Westfield Eastgardens and Vicinity Centres portfolio deals, which accounted for more than 75% of REIT purchases in 2018.
Rooney said that excluding these two transactions, REITs remain selective towards acquisitions and are focused on opportunities to create value within their own portfolios.
“A significant volume of offshore capital was injected into the retail sector in 2015 and 2016, but has moderated in 2017 and 2018. Nevertheless, the share of offshore capital (17%) is in line with the long-term average.
“Australia remains an attractive destination for offshore capital and we expect foreign institutions to be active participants in major transactions in 2019.”
A case study undertaken in September of overseas retail centres owned by Unibail Rodamco Westfield compared to regional centres down under showed prime Australian centres ranked as having the fourth-highest yield worldwide.
Australian Property Journal