Shopping centre supply shortage keeps investors interested

While shoppers continue to fork out money for goods they can’t live without, neighbourhood shopping centres are proving difficult to overlook for the real estate investor.

The consistency and reliability of income neighbourhood shopping centres provide amid positive spending patterns is seeing private investors swarm for opportunities across New South Wales despite the rising cost of borrowing.

And a shortage of opportunities is keeping the market competitive.

The renovated Richmond Mall, northwest of the Sydney CBD, which is anchored by a strong-performing Coles supermarket, was the first neighbourhood centre to be offered to the market in 2024. The public sales campaign and highly competitive bidding environment resulted in a private investor purchasing the centre for $35 million in May. The transaction reflected a fully leased yield of 5.73%.

Before the month was out, Rutherford Marketplace, 38km west of Newcastle, in Maitland, was bought by a private entity for $49.75m.

“Sydney’s suburban retail centres are a defensive play amid the economic instability, providing investors with a secure income stream,” says David Mahood, executive at JLL retail investments – NSW, who was involved in the Richmond Mall and Rutherford Marketplace deals.

The centres typically sit on large landholdings in key suburban locations, with mixed use development controls, which “underwrite the asset’s potential for long-term capital growth”, Mahood adds.

Syndicators, fuelled by the rising wealth of high-net-worth individuals have dominated the retail transaction landscape, accounting for more than 65% of assets sold in 2023. The trend follows a strong period of investment activity from institutional capital in 2020-2021, which withdrew as interest rates started to rise.

Elevated construction and debt costs mean the retail sector faces record-low supply, with Australia’s development pipeline for 2024 and 2025 representing only 21% of the 10-year average. Greater Sydney’s population growth forecast of 6.1 million people by 2041 – a million more than now – is likely to highlight this as an issue.

Until development costs become more viable, shopping centre owners are likely to favour smaller reconfigurations and upgrades to their assets rather than commencing large scale, pure play retail projects, according to JLL research.

“A supply dearth is undoubtedly a tailwind for the retail market, with existing centres and owners expected to benefit from improved productivity,” Mahood says.

Additional factors are combining to keep neighbourhood retail high on private capital’s shopping list. For one, online shopping still takes a backseat to a trip to a store. The share of online shopping has stabilised at 12.8% of retail trade, according to JLL research.

Another factor: consumers are still experiencing a “wealth effect”, thanks to rising house prices. Forecasts for house price growth in 2024 are in the 5% to 6% range, which can continue to support retail spending despite affordability issues and refinancing risks, according to JLL’s retail revival paper.

And government tax cuts are to deliver an additional $23 billion in spending capacity this financial year, according to Treasury estimates. If taxpayers spend just 25% of this amount, it will drive $5.8 billion of additional retail sales, or 1.4% of total retail sales, according to JLL research.

“Some subsectors of retail get heavily buffeted by economic winds, but neighbourhood shopping centres remain a steadfast, convenient community focal point that provide the day-to-day retail needs of local residents. That’s why this type of real estate remains resilient, and it’s of a scale that is accessible to a wider buyer pool,” Mahood says.