Retail assets prove value

Investors are eyeing opportunities in the state’s retail property market.

The opportunities available in Western Australia's retail property market continue to attract strong interest from investors on the east coast and overseas.

Since the start of 2018, the majority of transactions for neighbourhood shopping centres have been made by out-of-state investors (see table), with some of the latest deals including the $26.9 million sale of Woolworths Aveley to a private east coast investor, and a $19 million play for Kelmscott Plaza by a private Chinese investor.

Enquiries for the retail sales market were currently “firing”, according to CBRE WA retail investments negotiator Anthony Del Borrello, who said the recent uptick in interest prompted the firm to create a specialised retail investment team about 18 months ago.

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“Interest rates are low and there’s a relative difference in the yield investors are getting on the east coast and in Asia,” Mr Del Borrello told Business News.

“Melbourne and Sydney have been extremely hot markets. Some east coast investors, and we’ve been seeing a lot more Singaporean investors, don’t want to pay 3 to 4 per cent more for assets, so they’re likely to come and compete with the local private investors.

“If they’re investing in Asia or the east coast, the returns they’re getting aren’t as high as they’d be getting in Perth.”

Mr Del Borrello pointed to the recent Coles Riverton sale as one example.

“That sold to an east coast private investor; their rationale was that they were still investing in the majority of income coming from a subsidiary of Wesfarmers on a long lease,” he said.

“If they were to buy that same property in Melbourne or Sydney, instead of something like a 5 per cent return it would be closer to 4 per cent.

“So the bigger buyer pool has definitely increased the focus on these types of assets and is driving prices upwards to record yields.”

The Coles Riverton sale was brokered by national sales agency Savills, with Coles holding a 15-year lease and four 10-year renewal options.

Savills director of retail services, Chris Ireland, said the group received more than 290 enquiries for the asset, which had a 5,759 square metre retail component located on a 1.98-hectare site.

“The distinct lack of stock in the premium-grade retail sector in WA ensured the asset was well received by a buyer pool that has previously been starved for high-quality offerings,” Mr Ireland told Business News.

“Over the last quarter, more stock has come to market than where we were this time last year.”

Mr Ireland said demand across WA’s retail market was coming from both foreign and local investors, largely driven by price point.

Major sell-off

Mr Del Borrello said another driver was Coles’ and Woolworths’ decision to sell-off some assets.

“There’s more interest for that type of asset and that’s probably led by pent-up capital, because we haven’t seen those assets come to market for a while,” he said.

“There’s an understanding that there’s a larger buyer pool now and sellers can recycle some of their capital into higher-yielding assets, or into developments.”

Besides neighbourhood centres, Mr Del Borrello said demand for large-format retail was also growing.

Recent deals in this space include the $39.9 million sale of the Malaga Homemaker centre, brokered by Colliers International, to WA-based investor Quadrant Investments, and east-coast GDI Property Group’s $143 million bid for Ikea Innaloo in 2017, the sale of which was settled this year.

“It’s a growth sector at the moment,” Mr Del Borrello said.

“Most of these assets are 3ha to 4ha on main roads with national tenants and long-term leases.

“And in terms of the return you’re getting, it’s disproportionate to some of the neighbourhood centres. So you might get upwards of 7 per cent return for a large format, upwards of 6 per cent for your neighbourhood centres.”

He said finding continual income growth across all retail assets was an emerging challenge.

“Astute investors want growth of income and the way you find that is getting more difficult with each asset class, especially with the prospect of increasing online sales,” Mr Del Borrello said.

“You used to be able to rely on yield compression to get increases in value of assets; now the yields are at a point where they’re unlikely to compress anymore.

“So it’s getting more important for active asset management; whether that’s remixing the tenancies, using additional land on shopping centre sites to develop mixed-use like residential, or looking at anchor tenants’ turnover to see whether that’ll reach a threshold where you can get some additional income.”

Value

Local property development and investment firm MGroup has been busy in its asset management since entering the retail market in 2017, undertaking investment and tenancy strategies at its two shopping centres.

The group said both its Wodonga Plaza centre in Victoria and Chester Pass Mall property in Albany, had estimated value uplifts of between 15 and 20 per cent on the acquisition price.

MGroup managing director Lloyd Clark said when the company contracted Wodonga Plaza last year it was facing increased competition from two new shopping centres opening within a kilometre.

“Vacancies were high and customers had to cross the border to Albury for certain retailer needs,” he said.

“It was a problematic landscape, but we were confident in our capacity to turn things around.”

MGroup invested $2.5 million in a reconfiguration of the mall, which included the introduction of a food court and an increased fashion offer.

Within 12 months, MGroup has renewed or signed new leases for more than 60 per cent (30 retailers) of the tenancies, lifting the weighted average lease expiry (Wale) from less than four to about seven years, and Mr Clark said the centre was set to be 100 per cent leased by the end of the year.

The group has also improved commitments at the Chester Pass Mall (formerly Albany Brooks Garden shopping centre), largely as a result of negotiating a 10-year lease extension with anchor tenant Woolworths, increasing the Wale from less than two years to over seven years.

MGroup director James Collis, who heads the asset management division, said the firm had a number of plans on the table for the Albany asset, which comprised 2.7ha of undeveloped retail-zoned land.

“Significant traction has already been made through our targeted tenant negotiations. Additionally, we have been able to renew, relocate and expand a number of the sitting tenancies at the centre, which are now all trading well,” he said.

“Understanding retail behaviours and digging deep into local demographics has enabled us to make considered judgements and decisions that not only protect our investor interests, but create environments that will attract regional shoppers.”

Both Chester Pass Mall and Wodonga Plaza were previously owned by national retail conglomerate Vicinity Centres, which currently leads the list of WA shopping centre owner as ranked by collective size of centres on the BNiQ Search Engine (see table). 

Primewest could soon jump to first place if Vicinity is successful in its divestment strategy, however. In June, Vicinity announced that it would sell up to $1 billion of its neighbourhood and sub-regional shopping centres across Australia, with plans to reinvest into development opportunities within its core assets.

Vicinity has already sold one of these assets in WA.

Flinders Square sold to a private Australian property syndicator for $39.5 million in August, brokered by JLL, which has listed five more Vicinity properties on the market – Halls Head Central (50 per cent stake), Currambine Central, Kalamunda Central, Warnbro Centre and Stirlings Central.