Investors are putting quality retail assets at the top of their shopping list for 2023, but many are waiting to see how interest rates, inflation and other economic forces shake out first next year.
“There is going to be a lot more market activity occurring next year, provided that everything looks like it’s reaching the peak and we can see a way out of this,” Nik Potter, Associate Director – Research at Colliers, told ANZPJ.
“But we think investor appetite will come back next year, probably by mid next year.”
He said there would be a lot of activity for prime retail properties in particular, with investors on the hunt for quality shopping centres and other retail assets.
2022 was a game of two halves in the retail world, with the first half starting strong on the back of a record year of investment in 2021, driven by the lifting of various COVID restrictions.
Some of the big deals this year included Sentinel Property Group’s settlement on the purchase of the Casuarina Square shopping centre in Darwin for about $400 million; LaSalle Investment Management’s acquisition of the Crossroads Homemaker Centre in Sydney for $282 million; and Lendlease APPF Retail’s sale of Caneland Central in Mackay, Queensland for $280 million.
Caneland Central
In the second half of this year, macroeconomic forces such as rising interest rates and inflation have appeared to dampen investor confidence.
During the first three quarters of 2022, there had been $5 billion in retail deals.
Potter said retail yields were still relatively stable and offered a relatively healthier spread to the 10-year bond yield compared to office and industrial where he expected to see some softening.
“Most people are looking to get through this year and into next year for some clarity around interest rates and inflation,” he said.
“There’s still significant undeployed capital and it’s unlike previous times of economic uncertainty like the global financial crisis where it was difficult to get money.
“Most listed REITs and investors have pretty healthy balance sheets and access to money, so I think it’s just about looking for the right asset at the right price at this stage.”
So what’s driving this ‘flight to quality’ in retail?
Following the lifting of pandemic lockdowns and restrictions, Australia’s retail sector has bounced back remarkably.
“To date, it’s been about 90% of pre-pandemic footfall across most centres,” Potter said.
“People are tending to visit slightly less, but they’re spending more when they visit a retail centre, so you’re seeing many centres now outperforming their pre-pandemic trade levels.”
There’s also little new retail supply coming to the market, with one sub-regional shopping centre due to be completed over the next year.
“Existing retail assets in strong catchments are more tightly held because there’s no immediate competition coming in the near term,” he said.
“That limited supply coming to market is an opportunity for existing assets to grow rents and increase their market share.”
Casuarina Square
Potter said the Australian market, and Asia Pacific more broadly, was looking increasingly appealing to investors compared to Europe and North America.
Investor confidence in the US and Europe has been dampened by the risk of recession next year, as well as Europe’s energy crisis and the war in Ukraine.
Real estate investors with ESG (Environmental, Social and Governance) goals have also taken a greater interest in the Australian property market due to its growing adoption to ESG standards.
In addition, tenants were becoming more selective to where they opened new brick-and-mortar stores.
“In years gone by, tenants adopted a more scattergun approach to opening stores, whereas they’re a lot smarter now about where they want to be placed,” he said.
“That’s going to drive your strong performing retail centres, particularly ones that have taken time to actively manage their assets in the past years.”
Retail’s leasing activity has stabilised this year too, following a rebasing of rents during the previous two years.
Potter said rents should remain stable for at least another quarter and didn’t expect rents to decline next year.
“They would be more likely to remain stable for the time being just because you have retailers seeing a high performance of sales now, helped in part by the lower rents from the past two years,” he said.
“Occupancy costs are looking more sustainable than they may have previously, so we do see more upside in rental growth next year, particularly for some of those pockets of well-performing retail assets.”
Crossroads Homemaker Centre
One of those well-performing retail asset categories were neighbourhood centres.
These supermarket-anchored assets have been popular, having focused on non-discretionary items or everyday essentials at a time when consumers are facing rising cost of living pressures.
“We still think they will continue to be sought-after because in times of economic uncertainty, people still need to shop for their basic goods and services,” Potter said.
Potter said his team also expected larger super-regional retail assets to perform quite well.
He said a lot of shoppers were wanting to re-engage with retail and many of the larger super-regional assets were going big on experiences such as in-store activations.
“We have seen a notable drop off in online spending in Australia this year and we’re seeing a fundamental shift in people wanting to go back in store to pick things up and try things on,” he said.
Read our other 2023 Australian Property Outlooks
2023 Australian Industrial Outlook
2023 Australian Office Outlook
2023 Australian Residential Outlook
