Growth prospects fuel investor appetite for Australia’s large format retail sector

Investors are turning their sights to large format retail centres as strong population growth forecasts and a limited supply pipeline enhance the sector’s income and value prospects.

LFR assets are traditionally the most tightly held sub-sector in retail, with a limited number of assets transacting each year, despite strong buy side demand.

A new CBRE report shows institutional buyers accounted for 55% of Australia’s large format retail (LFR) acquisitions in 2022, compared to just 29% of the purchasing activity in 2021, with ongoing buyer interest expected to be fueled by housing demand, projected LFR rental growth and a limited supply pipeline.

CBRE Research Analyst Darcy Badgery noted, “Australia has one of the second highest projected population growth rates in the developed world at 15.3% between 2023 to 2033, which is likely to drive significant demand for housing and an associated tailwind for LFR sales figures. This could also lead to a chronic LFR shortage, with just 711,845sqm of space currently in the development pipeline between now and 2026 – equivalent to just 0.41sqm per additional person.”

Mr Badgery said the capital city supply situation was likely to be exacerbated by the lack of LFR centres in infill suburbs, particularly on the Eastern Seaboard.

“Particularly in Sydney, where the industrial vacancy rate has hit a record low of 0.2%, it may be more feasible for some developers to rework proposed or existing LFR centres for industrial purposes, which will further impact the supply outlook,” Mr Badgery said.

That shift was highlighted last year with Goodman’s $200 million purchase of the Alexandria Homemaker Centre in South Sydney to add to its development pipeline.

Notable recent transactions in the LFR sector included the $282 million acquisition of Sydney’s Crossroads Homemaker Centre by LaSalle Investment Management, Ashe Morgan’s $78.9 million purchase of Homemaker Prospect in Sydney and the $265 million sale of Homeworld Helensvale in South East Queensland to interests associated with Taiwanese-backed developer Shayher Group.

James Douglas, CBRE Senior Director, Retail Capital Markets, noted, “LFR assets are traditionally tightly held and rarely traded, as investors are attracted to strategic landholdings, which may offer a higher future use, transparent and reliable cashflows and higher than average expense recoveries.”

From a rental perspective, CBRE’s report forecasts that Sydney and Melbourne will maintain the highest growth rates of 5.1% and 3.9% respectively in 2023, supported by these cities having the highest expected migration intake and associated population growth.​