Investor demand for Australian retail to remain solid: Cushman & Wakefield
With Australian retail yields near historic lows, compared with fixed interest investments and retail property around the globe, retail property in the country continues to attract investors, says Cushman and Wakefield.
The commercial real estate firms Q3 Retail Snapshot summarises its findings for the Australian economy and the retail sector.
ECONOMY
The Australian economy performed more strongly than expected in Q2 2016, expanding 2.9 percent in annual average terms. This result outperforms the Q1 outcome of 2.7 percent and is similar to the trend rate of 3 percent.
Population growth, a slowly improving tourism sector and increased export volumes have helped to reduce the impact from declines in resource-based states. August saw a further 25 bps cut to the cash rate, to 1.50 percent, in an effort to boost lacklustre inflation. This coupled with a weaker exchange rate is providing a boost to housing and corporate activity.
RETAIL MARKET REVIEW
In the year to June 2016, Moving Annual Turnover (MAT) grew 3.8 percent, a modest decline on 4.1 percent in Q1, with both quarters below the long term average of 5.2 percent. Below average economic and income growth since the GFC have contributed to sub-trend retail sales MAT growth. Sales for discretionary items remain solid but a little below average, supported by South-East Australia’s housing boom. Consumer sentiment continues to trend at neutral levels.
INVESTMENT REVIEW
Robust investment volume continued in Q3 2016, with a total of $2.1 billion invested over 47 transactions. Investment volume declined quarter on quarter, but the number deals increased resulting in smaller average deal size. In line with this, activity in the quarter was focussed on smaller, neighbourhood centres whereas in the previous quarter volume was driven by larger CBD centres and portfolio deals.
A major contribution to quarterly result was the joint venture purchase of David Jones at 65-77 Market Street, Sydney by Scentre Group and CBUS from Woolworths Holdings for $360 million at an approximate initial yield of 4.50%. This transaction was part of nearly $1 billion invested in New South Wales retail over the quarter – almost 50% of the national total. Retail yields across most centre categories compressed further as evidenced in average transaction yields. Although foreign investment activity was more muted in Q3 at $445 million, offshore capital continues to target retail assets.
OUTLOOK
While Australian retail yields are near historic lows, compared to fixed interest investments and retail property around the globe, Australian retail property remains relatively attractive. This has resulted in strong demand for retail assets from both local and international investors as well as limited availability of quality assets. With interest rates generally expected to remain lower for longer, we expect ongoing investor demand to remain solid leading to further, but modest yield compression.
