OPINION: THE retail commercial property market continues to show remarkable resilience, presenting an opportune moment for investors to seize new opportunities. Matt Healy, Head of Retail, Development & Mixed-Use at Elanor Investors Group, explores the positive short- and long-term tailwinds in retail real estate and why it could be the perfect time to invest.
The fundamentals of the retail sector remain undeniably strong. Despite high profile commentary around the spike in cost of living and the rise of online shopping, the retail sector represents attractive cash yields relative to other sectors of office, industrial, and alternatives. In fact, it has been the highest yielding commercial property sector on average since 2018.
Demand for retail space continues to outstrip supply. Market analysts have suggested over the next five years, three super-regional shopping centres would need to be developed in each of Melbourne, Sydney, and Brisbane to effectively cater for the population and sales growth that we’re currently seeing in the market.
Strong fundamentals
There are several tailwinds underpinning the strong fundamentals supporting the retail sector.
Consumer resilience has been a major positive story for this sector over the last five years, with retail spending growing at 5.1 percent each year since 2020. That’s 1.2 percent higher than the 25-year average, with aggregate retail sales now tracking at $35 billion per annum.
This growth has been driven by fiscal stimulus, excess household savings, consistent low unemployment and strong long-term population growth acting as a natural boost to retail sales. The stage three tax cuts due to come into effect on 1 July 2024 will act as further stimulus, with Deloitte forecasting a sales increase of 1.4 percent in FY24/25[1].
At the same time, online sales, which have long been seen as the death knell for bricks and mortar, have stabilised with online penetration – the percentage of online sales versus total retail sales – settling at 10.5 to 11 percent. This is significantly down from the peak experienced during the COVID-19 pandemic and much lower relative to other markets globally.
All these positive thematics are being played out at a time when forecast retail supply has never been tighter. Elevated construction prices, in the short and medium term, will further limit supply of shopping centre floor space. This, along with continued above average population growth, will act as a natural moat around retail real estate for the foreseeable future.
Think global, act local
Strong fundamentals have driven increased interest from offshore institutional investors in Australia’s retail real estate, and when comparing the local outlook to peer global markets, it is not hard to see why interest is ramping up.
In looking at the USA, UK, and Canada, Australia’s retail real estate presents a full house of positive tailwinds that are driving demand and growth. This includes population and economic growth, limited online penetration due to the large geographical landmass of Australia, and high wage growth relative to other jurisdictions.
Perhaps the widest moat around the Australian real estate sector is our limited supply. At just 1.1 square metres of floor space per individual we are significantly lower than the USA and Canada. Given long lead times to the planning approval processes, shortages of labour, and high construction and financing costs, this shows no sign of changing anytime soon.
On every metric the retail real estate sector has the opportunity to outperform in the medium term.
Retail and beyond
While the Australian retail sector has historically generated high cash yields, there remains further opportunities to improve capital value through value-add initiatives such as repositioning and redeveloping retail real estate.
Retail centres are typically located within growth corridors and have access to critical infrastructure on main travel nodes, whether that be highways, orbital roads or rail infrastructure. That, combined with favourable zoning and planning controls, and often large parcels of non-income generating land, presents an opportunity for shopping centres to profit from alternate usages within their current land holdings.
There are opportunities to add value by thinking outside the box and looking to the residential and broader commercial sectors. For example, build-to-sell, build-to-rent, or affordable housing are in high demand from a residential perspective. Subdividing, developing, or selling non-income generating parcels of real estate provides a unique opportunity for retail property owners to better realise value of underutilised land holdings and has the potential to underpin land value of retail real estate moving forward.
Further opportunities also exist to expand the commercial usages within retail shopping centres. This includes childcare, fast food sites, office space, or as Elanor is increasingly seeing in its centres, the opportunity for university education to be integrated into shopping centres.
Time to buy?
The retail real estate sector provides a compelling investment proposition at this point in the cycle. If we were to look back over the last five years, there has been a disconnect between asset valuations and asset performance.
Asset values have decreased 12 percent since their peak valuations in 2018, yet sales performance (MAT) has grown by 14 percent over the same period. The devaluation cycle that started in 2018, we would say, was driven by an overreaction of the risks facing retail real estate and an overallocation to other sectors.
Strong retail fundamentals, a reset in rents and valuation, and the sector’s significant opportunity for alternative value-add, redevelopment, and repositioning all point to this sector providing a compelling opportunity. In our opinion, it’s time to buy.
By Matt Healy, Head of Retail, Development & Mixed-Use at Elanor Investors Group.
[1] Source: JLL Research, Deloitte Access Economics
