Australian retail property continues to be a major recipient of investment capital, with investment volumes sitting at $9.98 billion nationally, according to Savills Australia’s latest research.
Our Q3 National Retail Quarter Time report highlights this figure as another record year for investment volumes, growing 33 percent throughout the 12 months to September 2018.
Interest in retail assets even through muted market
Recent transaction volumes are reflective of activity that has occurred on the back of big-ticket shopping centre sales.
There is still considerable interest in Australian retail assets from both domestic and foreign investors, in spite of a relatively muted retail market for the past two years.
Positively, Savills is now seeing economic fundamentals supporting a rebound in retail trade, which will help to further enhance the attractiveness of retail assets.
Retail trade growth throughout the past year has been notably below long-term averages across all states nationally, except in Victoria and Tasmania, but forward-looking indicators suggest a renewal in real wages growth will help buoy the retail sector during the next 12 to 18 months.
Strategy shift over the last year
The high transactional value reported is reflective of the price points that have been exchanged throughout the past 12 months, with $5.5 billion of the $9.98 billion recorded being assets selling for $100 million or more, led predominantly by institutional investors trading large-scale assets on the eastern seaboard.
This trend has driven a significant volume of overall investment in Australia, especially in the regional and large-format sectors, which have been traditionally tightly held.
This sales activity has been supported by a noticeable shift in strategy, from major domestic and foreign trusts and funds to reweight and/or redeploy capital towards core or core-plus assets, either through direct acquisition or development.
Institutional investment has averaged about 40 percent annually throughout the past 10 years.
The shift in strategy is clearly evident in the past 12 months, with total acquisitions (for assets more than $5 million) by domestic institutional investors accounting for approximately 53 percent of total investment volumes in the year to September 2018.
There had definitely been a shift in institutional investors’ position as net sellers, particularly along the eastern seaboard.
Divestment closely aligned with level of investment
The report shows that about $5.81 billion in assets were sold by institutional vendors in the 12 months to September 2018 (58 percent of volumes), compared to just $2.8 billion in the 12 months to September 2017, or 38 percent of overall vendor activity.
As a proportion of overall volumes, this level of divestment has not been seen since 2012, and what makes the past 12 months interesting is the level of divestment is closely aligned with the level of investment, both in direct acquisitions and in regards to redeveloping existing centres.
Vicinity’s recently announced sale of eleven non-core centres for $631 million is an example of this trend, with sale proceeds expected to be reinvested into unlocking value in existing centres and fulfilling the development pipeline.
Stockland has also announced plans to divest up to $300 million of retail assets throughout the coming 12 to 24 months, and Charter Hall has divested a number of non-core neighbourhood centres as the company continues to enhance its retail portfolio.
While there are examples of regional centres trading on market yields of 4.25 percent, it is important to note that historically, this segment has been tightly held for so long that the recent availability of these assets in Australia potentially represents the structural shifts occurring in the retail sector generally.
Institutional owners are being strategic in regards to the value-add opportunities of their assets.
For some, this has meant selling down non-core assets, and for others, buying core or core-plus assets.
Investment volumes across Australia
Our latest Quarter Time reveals that all markets, except South Australia, recorded an increase in overall investment volumes in the sector, with New South Wales reaching its highest value of transactions (for more than $5 million) in more than a decade.
At 39.7 percent, investment volumes in New South Wales accounted for the largest share of the national volumes recorded for the past 12-month period, rising 43 percent from $2.77 billion in September 2017 to $3.96 billion in September 2018.
Queensland accounted for 29.1 percent of total investment volumes at $2.90 billion, compared to $1.36 billion in the year to September 2017, while Victoria accounted for 21.6 percent of national volumes at $2.16 billion, up from $1.88 billion in September 2017.
Queensland was the stand-out market for the 12 months to September 2018, with total investment volumes rising more than 100 percent on the same time last year.
Together with New South Wales, these two states accounted for more than half of the year’s investment volumes recorded nationally.
Western Australia and South Australia accounted for about 8.0 percent of the total volumes, with Western Australia’s volumes increasing 48.7 percent to $670 million, up from $450 million.
South Australia declined 33 percent from $244 million to $162 million throughout the same period, reflecting the tightly held nature of that market.