Q1-17 – Retail Markets Wrap Up

4 April 2017

Retail Markets Wrap Up – Q1, 2017 Australian retail property remains a highly sought after investment class. Planning restrictions which restrict supply, along with a range of asset types and pricing keep the sector in favour with a broad cross section of private and institutional investors. In Q1, 2017 transactions volumes fell 12% in volume to $907 million compared to the previous quarter but was up 100% on Q1, 2016. The actual number of transactions was at a high of 20 for the quarter up from 16 last quarter and 13 in the 1st quarter last year. The statistics also show the median asset price is at a low of $26 million down from $34 million last quarter but similar to the same quarter last year. QLD accounted for over half of the transactions this quarter, followed by Victoria. What does this mean ? The assets sold this year, and through most of last year have been the neighbourhood style centres of up to 10,000sqm in size, typically with one or two supermarkets and supporting convenience retail stores. In Q1, 2017 only 3 assets above this size traded hands including the DFO South Wharf (25%), Canberra Outlet Centre and Redbank Plains Town Square. The drop in volume reflects the lack of large quality assets in the market. Are these results supported by softening yields ? Retail yields remaining relatively consistent throughout 2016 and into 2017, averaging at approximately 6.5%. The 3rd Quarter of 2016 saw a number of exceptional assets trade hands with a weighted average cap rate of 5.4%, partly reflecting the potential development upside involved in those assets. Such strong results haven’t been evident yet in 2017. So What has changed ? Clearly things have changed over the past quarter. The new US government has begun to have an influence on the global market. Ten year Aussie Bonds yields rose 40Bps shortly after the election and continued to climb to a high of 2.98%, and now settled to 2.72%. The prospects of higher US interest rates has elevated as has the prospects of higher local interest rates to counteract what may become a strengthen Australian economy and a falling Aussie dollar. As these factors play out, there also remains the prospect of foreign capital returning offshore to chase better returns. We have already seen Blackstone list their retail portfolio. Retail will likely face further headwinds in months to come as traditional retailing continues to feel the impact of the on-line world. Amazon’s expected entrance to Australia will place increasing pressure on the department stores and discount department stores who have struggled for years to find their niche. Overseas entrants will continue to pressure the local operators whilst a number of high profile tenants have already closed shops including Dick Smith, Pumpkin Patch, Payless Shoes, Howard Storage and of course, Masters. Ongoing challenges in the retail environment will continue to pressure the retail asset class with likely impacts to net income and capital requirements. On the flip slide, a strengthening Australian economy will continue to support consumption in areas of high employment. Most major landlords are well placed to adapt to the changing environment and owner of local neighbourhood centres will always favour the convenience shopper. What Next ? Whilst interest rates remain relatively low, we expect demand for retail assets to continue to be high, particularly for neighbourhood and super regional centres. Sub regional centres in areas of high unemployment are most vulnerable and will likely see softer cap rates as consumer spending and retail habits impact of the quality of the cash flows. Other Wrap Ups Check our our other 1st Quarter Wrap ups at https://www.cmaust.com/news About Us Propel is a property based advice, research and economics group providing support to institutional investors. We provide assessment on direct investment and development transactions, listed real estate, and investment strategy. We are part of Capital Management Australia, a boutique funds management business.