Retail market benefitting from foreign investor and business confidence

Foreign investors and businesses have been showing a great deal of confidence in the Australian retail market, and all types of retail property are benefiting.

South African retail group Woolworths last week made a $2.15 billion bid for David Jones, with the $4 a share bid representing a 25.4% premium to the previous day’s closing price for the Australian department store’s stock. Woolworths’ chief executive Ian Moir told media the company planned to expand David Jones and add more than $130 million to its bottom line over the next five years.

The proposed takeover is the latest in a series of offshore retail entries into the Australian market.

Swedish fashion retailer H&M opened its first Australian store in Melbourne’s GPO at the start of April. Japanese brand Uniqlo is due to open its first store at Emporium Melbourne on Wednesday April 16.

Those brands follow others such as Zara from Spain and Top Shop from the UK, as well as Canadian home ware retailer Williams-Sonoma which have all entered in the past few years.

The international brands favour being located in prime shopping locations, which has boosted assets in those areas.

Retail sales more generally have been improving and major regional shopping centres have benefited.

Turnover rose 0.2% in February 2014 in seasonally adjusted terms, following a rise of 1.2% in January 2014, Australian Bureau of Statistics data released last week shows.

Victoria was the largest contributor to the rise, with turnover increasing 0.5%, followed by Western Australia with a 0.4% increase and New South Wales with 0.1% more turnover.

Resilient returns on major regional shopping centres are attracting institutional investors, Colliers International national director of retail investment services Lachlan MacGillivray said in March after facilitating the sale $496 million of a 50% stake in Northland, a major shopping centre in Preston in Melbourne’s northern suburbs, to GPT Wholesale Shopping Centre Fund.

“Yields for this asset class across Australia currently range between 5.25% and 6.00%, reflecting the significant value and core nature of this asset category.  However, the increasing demand over recent years has led to some yield compression,” MacGillivray said.

More than $7 billion worth of shopping centres transacted in 2013, a record for the sector, and the trend is expected to continue this year.

Investors are also pursuing smaller retail properties, particularly in Melbourne.

At the start of April, a local private investor paid $1.67 million representing a yield of just 4.58% for a strata retail premises at 353-355 Flinders Lane in Melbourne leased to Café Del Corso, until November 2020.

In March, a private Chinese investor paid $1.05 million for a 20 square metre property and $2.1 million for a 281square metre store, both ground floor of 114 Russell Street, Melbourne. A separate Chinese buyer bought an adjoining 235 square metre property in the same building for $1.61 million. The sales were made at initial yields of around 6.5%.

CBRE negotiator, Victorian retail investments Rorey James said the depth in the market for sub-$5 million strip retail properties in Melbourne was as diverse as it had ever been.

“We are receiving strong interest from local, national and offshore parties all looking to capitalise on both the low interest rate environment and the improved retail tenant and consumer confidence,” James told Property Observer.

“Buyers are looking for alternatives to term deposits and the volatile share market and are willing to pay premium prices to secure these properties.”

Melbourne has more than 20 substantial retail strips, with the prime shopping areas, such as Acland Street, Chapel Street, Church Street and Carlisle Street, being the most sought after and tightly held in the current marketplace. 

CBRE recently sold a property in Acland St for a tight yield of 3.7% and price that reflected the highest building rate ever paid in the strip. Other recent sales include two properties on Toorak Road that sold at yields below 5% and a retail premises on Bay Street, Brighton that went for a 3.7% yield. 

James said the strong results were evidence of unprecedented buyer demand for sub-$5 million retail investment properties at a time when there was a significant lack of buying opportunities combined with record low interest rates, which was spurring investors to compete to acquire the assets.

The lack of prime strip properties being offered to the market was forcing investors to look to secondary locations, such as Bridge Road, Richmond, where retailers have not been performing as strongly, he added.

"We are noticing a heightened level of buyer demand in secondary locations given the inability to purchase properties in prime strips, and this increased demand is seeing yields compress in all Melbourne strip retail markets,” James said.

The early strong results set the benchmark for 2014 and were clear indicators that buyers were aggressively seeking high quality retail properties in well located areas and were willing to pay premium prices.

Offshore buyers entering the Victorian commercial property market were also having a positive effect on pricing when vendors decided to bring their assets to market for sale.