August 2021

Research

Retail Investment
Review
FY2021
Market Review
Retail investment activity has continued to improve The demand for larger neighbourhood and smaller,
from the low sales volumes recorded at the peak of more convenience-based sub-regionals has been a key
the pandemic in Australia (March to June 2020). trend over FY21, in part due to the outperformance of
The rebound in transaction activity is reflective of supermarkets and discount department stores during
improving investor confidence and liquidity in the the pandemic. The sale of neighbourhood and
retail investment market. sub-regional centres accounted for 56% (or $4.1
billion) of total transaction volumes in FY21. CBD assets
Australian retail transaction volumes totalled $7.3
represented $1.5 billion of total sales for the financial
billion in FY21, 11% above the $6.6 billion recorded in
year (equivalent to 21% of the total), with the three
FY20, and above the 10-year (financial year) average of
department store sales accounting for 60% of total CBD
$6.8 billion. The second half of FY21 ($3.6 billion) was
transaction volumes (David Jones Sydney $510 million,
particularly strong compared to the second half of FY20
David Jones Melbourne $121 million and a two thirds
($1.2 billion), which was the lowest second half of sales
share in Myer Melbourne $270.4 million). Meanwhile,
activity recorded since FY09.
there was $1.3 billion of large format retail (both single
There have been 19 sales over $100 million in the and multi-tenant assets) transactions in the last 12
last 12 months, with ten of these occurring in 2Q21, months (equivalent to 18% of the total). The sale of
representative of the greater certainty around pricing Bunnings Warehouses represented the vast majority
and income for medium scale assets. Meanwhile, (58%) of total large format retail transactions, reflective
liquidity has yet to return to regional shopping centres of the demand for assets with strong, single covenants,
(last trade was the end of 2019), with a movement away long WALE and underlying land value.
from traditional ‘core’ regional assets, to assets with
stable income, strong covenants and long WALE.

Retail Investment Market Review | 2

 Transaction volumes by sub-sector - National

$12

$10

$8
Billions

$6

$4

$2

$-
FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Regional Sub-regional Neighbourhood CBD Large format retail Other

Source: JLL Research

Retail Investment FY21 breakdown

Sub-regional Neighbourhood CBD Large format retail Other

Source: JLL Research

Retail Investment Market Review | 3

Confidence improving at pace.
The first half of 2021 has seen incredibly strong demand
for retail assets with constrained supply across most
retail sub-sectors. Off the back of a strong second half of
2020, investor confidence continued into 2021 resulting
in compressed pricing (in some sub-sectors) resulting
in owner confidence to bring assets to the market in a
competitive environment.

Smaller neighbourhoods and sub-regional centres

<$200million (with less tenants) have now firmly
established themselves as the ‘new core’. The capital
hunt for yield, overlaid with the scarcity supply and
competition at the lower price points is now driving
investors up the price curve in search for opportunities
and enhanced returns. We anticipate this trend to
continue with larger trades emerging >$300m in the
back end of 2021.

As global markets reopen and larger trades emerge,

we are starting to see increased enquiry from offshore
capital. However, restricted travel is still impacting
offshore capital’s ability to compete. The new world of
virtual inspections is a marketing measure that’s here to
stay and is increasing bidding depth both offshore
and domestically.

Our campaigns over the last six months have resulted in

over $5 billion of underbidder capital that are continuing
to pursue retail opportunities, over 20% of which is
maiden capital into the retail market. Whilst a large
portion of this capital is focused on the convenience
and large format sectors, these groups are now engaging
on regional and super-regional assets, of which we
anticipate increased transactional activity over the next
six months.

Nick Willis
Senior Director
Retail Investments, Australia

Retail Investment Market Review | 4

Four themes shaping
the retail investment
market in 2021
1. How will the retail ownership profile change?
Diversified and multi-asset class investors have Rents have re-based and cash flow, in terms of rent
historically maintained an overweight allocation to collections rates, recovered within six months of the
retail as the sector has historically delivered superior end of lockdown restrictions. Retail is now the highest
risk-adjusted returns. Several fund managers have yielding commercial property sector and is attracting
been unwinding their overweight allocation for some new types of buyers, predominantly syndicates, which
time now. It has occurred partly through growth in are moving up into a new price cohort of up to $250-300
other sectors like office and industrial & logistics million. The spread between yields and the risk-free
(development and valuations), and partly through the rate (inflation-indexed bond rate) is wide and close to a
divestment of retail assets. Stockland, Vicinity Centres, record high, suggesting there is a sufficient buffer if there
AMP Capital, QIC and Lendlease have been net sellers. were to be any further reversion in bond yields.

A range of new capital sources have emerged to acquire Major owners are repositioning their portfolios, which is
assets in the retail sector, taking advantage of dislocated creating a pipeline of retail assets for divestment. With
market conditions and recalibrated asset values. Values a correction in values, the re-basing of rents and high
for regional shopping centres have corrected by 17.5% yields relative to other asset classes, it is likely that a
from the peak in 2018 to March 2021, and by 12.3% for wider range of investors will enter the retail sector as the
sub-regional centres over the same period. value proposition becomes more pronounced.

Retail Investment Market Review | 5

2. How will shopping centres evolve to incorporate alternate uses?
One of the biggest opportunities for shopping centre owners and investors over the next decade is to unlock value
with the addition of alternate uses through redevelopment. For some recent buyers of retail assets, the potential
for redevelopment is short term. They see it as an immediate opportunity to add other uses to the existing site to
maximise value. For other investors, the opportunity is more long term and treated as a factor which supports the
land value.
What are the alternate uses?
The type of alternate use will vary significantly between individual properties, depending on
the location, demographics of the area, infrastructure and proximity to transport. Last mile
logistics is a current priority, given shopping centres represent a network of sites in metropolitan
locations, and the scarcity of suitable locations for urban logistics facilities. Retail owners are
also exploring options for residential, build-to-rent, hotels, offices and social infrastructure uses.

What are the limitations?

However, a number of factors have inhibited the mixed-use trend from occurring on a
more widespread basis in Australia. Firstly, ownership of retail assets has historically been
concentrated among a small number of institutional owners, many of which have a single-sector
mandate. Secondly, raising equity is challenging for many major retail landlords at present,
which constrains funding for a mixed-use pipeline without joint venture capital partnerships.
Thirdly, disruption to retail operations during construction phases, and in terms of the ongoing
management of the shopping centre, is another obstacle that needs to be overcome. Finally,
feasibility has been less supportive of full or partial conversion in Australia because valuations
have been more resilient than in other countries where the conversion trend is more prevalent.

What are the benefits?

The main benefit of incorporating other uses into a shopping centre site is income
diversification. The diversification of income reduces the reliance on traditional retail income
and tenant base. It hedges against future downside risk to physical retailer performance.

Retail Completions - Australia

900
*Forecast
800

700

600
'000 sqm

500

400

300

200

100

0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
CBD Regional Sub-regional Neighbourhood Large Format Retail Multi-Unit Other Projects on hold

Source: JLL Research

*includes under construction and plans approved projects
Retail Investment Market Review | 6
3. How will a thawing of global retail capital markets impact Australia?
A range of major retail assets (>$300 million) are now • Of the top five largest retail transactions in North
being offered for sale in Australia. They are primarily America since the start of 2020, two were Power
passive stakes and part-share interests which will be a Centres (Large Format Retail) – a sector which
key test for the level of demand and pricing for this style performed well during the pandemic, one was a
of asset. swap between joint venture partners and
one was a department store building (Lord &
The last Australian shopping centre transaction above
Taylor Manhattan).
$300 million was in December 2019 (50% share in
Garden City Booragoon for $570 million). The lack of With global investors beginning to invest into the retail
transaction evidence has led to valuation uncertainty. sector once again, Australia is likely to rank highly on
The operating environment has changed significantly the target list. The faster than anticipated economic
since the last major transaction, which is why the next recovery and management of the health crisis are two
six months will be key for large-scale retail valuations. main reasons for offshore investor interest, in addition
to the traditional appealing factors of transparency, high
Globally, retail capital markets are starting to thaw, with
population/GDP growth and the tight retail planning
some major transactions having recently occurred as
regime in Australia.
investors re-engage with the retail sector in search of
relative value. Some of the recent transactions that have
occurred globally, include:

• Brookfield acquired a portfolio of shopping centres

in China (Mosaic portfolio) for $1.4 billion (USD)
from ADIA/MIRA in June 2021. It is the largest retail
transaction globally since the onset of COVID-19
in early 2020. The portfolio includes five shopping
centres totalling approximately 260,000 sqm.

• Brookfield also acquired the Hammerson retail

parks portfolio in the UK for approximately $456
million (USD) in April 2021. The portfolio included
the seven remaining UK retail park assets owned by
Hammerson, after gradually selling down their retail
parks since an announcement in 2018 to focus more
resources on flagship assets. The portfolio was sold
on a net initial yield of 8.6%. Pricing reflected an
8% discount to the December 2020 book value, and
an 18% discount to the previous offer from Orion,
received in February 2020.

• LINK REIT acquired Happy Valley Shopping Mall,

Guangzhou, China for approximately $501 million
(USD) in June 2021, reflecting an approximate yield
of 4.0% on passing income. It was the second major
retail acquisition in China by LINK REIT in 2021,
following the purchase of a 50% share in Qibao
Vanke Plaza, Shanghai for approximately $480
million (USD) in April.

Retail Investment Market Review | 7

Food for thought - retail real estate, an
inflation hedge?
In the current economic environment, the inflation
debate is one of the most contentious in global
economics. Central governments are increasing money
supply at record levels. To date, there are signs of
inflation starting to appear across global markets, but
the full impact will not be known until later in the cycle.
However, history does show that scarce real estate is one
of the best hedges against inflation.

What does this mean for retail real estate?

With historically low levels of new supply of retail and
shopping centres, combined with the weight of capital
seeking income producing real estate; we are seeing
unprecedented volumes of mostly local capital seeking
established, strongly performing assets. To date, we
have seen lower levels of offshore capital enter the
market since the onset of the pandemic, largely due to
their experience in other overseas markets and inability
to travel. This is resulting in domestic buyers that are
more comfortable with the local retail market, taking
advantage of lower levels of competition from offshore
capital when compared to other sectors. According to
Massachusetts Institute of Technology in the USA, retail
real estate income has the highest correlation with
inflation of any of the main real estate sectors. With
global concerns about inflation, Australian shopping
centres offer an attractive hedge given that a high
proportion of leases are typically linked to CPI with an
additional growth component (of 1-2% p.a.). Time will
tell as to whether the impact of online will be as severe
as some predict or whether the human desire for retail
therapy will win out. Our live and on the ground market
intelligence suggests that the growing demand for prime
retail assets proves that the tide of anti-retail sentiment
is starting to turn.

Sam Hatcher
Senior Director
Retail Investments, Australia

Retail Investment Market Review | 8

4. What’s in store for the retail spending recovery?
Retail turnover recovered swiftly in May and June 2020, The prospect of wage growth has improved significantly
following the national lockdown. Stimulus measures as the labour market continues to tighten. The
initiated the strong rebound in mid-2020. Two main unemployment rate declined substantially over the
stimulus packages supported the retail turnover growth past year, from 7.4% in July 2020 to 5.1% in May 2021.
recovery. Firstly, the withdrawal of superannuation Underemployment, which is a key indicator of labour
($36.4 billion, equivalent to 10% of annual retail market tension required for wage growth, is at its lowest
turnover) and secondly, the JobKeeper wage subsidy point since 2014. The Reserve Bank of Australia (RBA)
scheme ($101.3 billion). predicts the unemployment rate to reach 4.3% by
December 2022, which would be supportive of a wage
Retail turnover growth has transitioned from a
growth recovery.
stimulus-induced recovery in 2020 to being driven by
self-sustaining cyclical economic drivers in the first There is also upside risk to population growth through
half of 2021. There were concerns in 2020 that retail international migration. Given Australia’s ability to
turnover growth would slow substantially as stimulus manage the health crisis, fast economic recovery
measures rolled off from around March 2021. However, (leading to strong job prospects) and liveability
the Australian economic recovery is well ahead of characteristics, it is likely that more people will
expectations, particularly in terms of the labour market be seeking to migrate to Australia than before the
and rising house prices, which fuelled consumer pandemic. A ‘catch up’ scenario, assuming all of the lost
sentiment and supported the wealth effect. As a result, 2020 and 2021 population growth from international
retail sales grew by 9.5% year-on-year (MAT measure) migration is deferred, not lost, would result in an extra
in April 2021 - the highest rate in 34 years. 551,000 people or 0.7% per annum over 2023 to 2025.
That would boost population growth to 1.9% per
But what will drive the next phase of the retail recovery?
annum over those three years. Ultimately, international
There is strong upside potential to the key underlying
migration will be a policy decision, but given the low
drivers of retail spending – wage growth and
unemployment rate, there are fewer sensitivities to
population growth.
reopening borders for migration.

Consumer Sentiment & Unemployment Rate

130.00 8.0%

120.00 7.0%

110.00
6.0%
Unemployment rate
100.00 forecast
5.0%
90.00
4.0%
80.00

70.00 3.0%

60.00 2.0%
Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 Jun-17 Jun-18 Jun-19 Jun-20 Jun-21 Jun-22
Unemployment rate (RHS) Westpac consumer sentiment index (LHS)

Source: ABS, Westpac, Westpac-Melbourne Institute, JLL Research

Retail Investment Market Review | 9
Post Victorian lockdown, convenience assets
and private investors dominant
In line with the broader commercial property market,
transaction volumes in the retail sector were subdued in
2020. This trend was particularly pronounced in Victoria,
with total 2020 transaction volumes more than 42% less
than the 10-year average.

However, 2021 has seen an incredible rebound, with

convenience retail assets driving transaction volumes.
Whilst this is a national theme, it has been particularly
distinct in Victoria, and we relate this to the protracted
lockdowns that the state endured. The greater the
impact of trading restrictions on businesses and tenants,
the higher value investors are placing on those tenant
covenants which have proven an ability to continue
to trade and pay rent. Supermarkets, Bunnings leased
investments and neighbourhood centres are the clear
focus of majority of active purchasers in the market,
and this weight of demand is translating to yield
compression and deal volumes.

In Victoria the average number of neighbourhood

centres which transact per year is between six and
seven. In the first half of 2021 we have already seen eight
centres change hands. The Melbourne market continues
to be dominated by private investors.

Stuart Taylor
Senior Director
Retail Investments, Victoria

Retail Investment Market Review | 10

Research

Andrew Quillfeldt
Senior Director,
Retail Research - Australia
[email protected]

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