Large format retail property to take a breather after strong growth in 2016: BIS Shrapnel
The large format retail property sector will likely not be able to sustain the strong growth trend of 2016 as weakening consumer demand for household goods is likely to hurt the sector in the near term, according to new research.
Last year saw a fall in vacancy rates at retail centres, while rental growth was the strongest since before the GFC, investment yields firmed on the back of record investment transactions, and double-digit total returns were recorded. But these buoyant conditions will not be sustained, says research firm BIS Shrapnel’s latest Large Format Retail Property report.
Report author Maria Lee, senior project manager at BIS Shrapnel, notes that the key drivers of consumer demand for household goods—which accounts for the majority of floorspace in large format centres—are either already weak or have started to weaken. Sluggish economic growth and subdued consumer sentiment are likely to continue for some time.
Meanwhile, housing commencements and alterations and additions activity have peaked, while turnover of existing dwellings fell sharply in 2016.
“We’re already seeing the effects in turnover data, which has slowed sharply in recent months” says Lee, qualifying that “the larger retailers and chains are holding up better, but they aren’t immune.”
Chart below shows the slowdown in demand.
Meanwhile, the closure of Masters and planned reconfiguration of most of its stores into large format centres with an internal mall will cause a spike in ‘new’ supply of centres.
“There’s still a lot of uncertainty at this stage regarding the fate of the ex- Masters stores. However, if we take at face value Home Consortium’s plans, and allow for Bunnings to take some of the vacant stores, there could be up to 700,000 square metres of ‘new’ centre floorspace as well as new development on sites owned by Masters,” said Lee.
BIS Shrapnel says this represents several years’ demand even allowing for the ‘transfer’ of turnover from Masters to replacement retailers. The report cautions that, at a time of softening demand, the sector could have trouble absorbing the floorspace and forecasts rental growth to weaken.
On a more positive note, the report predicts stronger consumer spending growth in the longer term and a continued expansion of the retailer pool that large format centres tap into.
“The sector continues to evolve. Large format centres offer relatively cheap space that is attractive to a range of uses. Some centres are morphing into mixed-use, lifestyle or even convenience centres” says Lee.
Overall, BIS Shrapnel forecasts internal rates of return of around 10 percent over a five or 10 year investment horizon. This compares well with other shopping centre types and property classes.