JLL’s annual Shopping Centre Investment Review and Outlook 2018 states investors will strategically position themselves in 2018 to gain market share in a changing and competitive environment, which drove transactions in 2017 to the second highest level on record at $8.8 billion
The changing and competitive retail environment is driving transaction activity for shopping centres, as owners refine their portfolios, adjust their exposure to different states and asset types and seek greater diversification to improve their long-term risk-return profile.
JLL’s Australian Shopping Centre Investment Review and Outlook 2018 states that a widening variance between individual retailers and between the performance of prime and secondary grade retail assets has resulted in investors becoming increasingly selective and cautious in terms of shopping centre performance.
This will drive investor decisions in 2018.
JLL’s Head of Retail Investments – Australasia, Simon Rooney said, “Investors clearly have a diversity of views on the outlook for the Australian retail sector, which stimulated near-record levels of asset trading for shopping centres in 2017.
“Given the compression in yields over the last few years and the increasing reliance on income growth as a driver of returns, asset selection will be key in 2018.
“Opportunities for high-yield investors are emerging in 2018 given the increasingly diverse underlying performance of centres, particularly in the sub-regional shopping centre sector.
“We expect high quality retail assets to remain resilient, delivering attractive returns and therefore are continuing to be highly sought after by investors.
“Experienced and active asset management will be key to extracting value and delivering outperformance in this competitive retail environment, which is supportive of the ongoing trend towards joint ventures.
“Owners have been undertaking strategic portfolio restructuring in the last few years to re-position their businesses for growth. While a lot of these strategic manoeuvres are now largely in place, for most groups, we still see the need for ongoing tactical adjustments to retail portfolios (sales and acquisitions) to maximize portfolio returns,” said Mr Rooney.
JLL’s Director of Retail Research, Andrew Quillfeldt said, “Increasing divergence in the sector is creating risks and opportunities for owners. While e-commerce is weighing on shopping centre sales growth, some of the cyclical drivers of retail spending are showing more positive signs of a recovery in the short-term. Lower quality retail assets have been most affected by changes in the retail industry, but quality retail assets are continuing to perform well.
“The retail sector is going through a period of adjustment as retailers continue to revise their business models to reflect the globalisation of retail, changes in technology, changing consumer preferences and trends between generations.
“Retailers are rationalizing their store networks and/or relocating to better performing centres with a stronger trading profile or more dominant position within their catchment.
“Shopping centre owners will continue to leverage technology as an opportunity, find new ways to adapt the physical retail environment to the latest consumer trends and engage with new and innovative retailers,” said Mr Quillfeldt.
Offshore investment down by 46% in 2017, but indirect investment into domestic funds:
Offshore investors were a much smaller proportion of transaction activity in 2017 than the previous year. Acquisitions by offshore investors declined to $1.4 billion in 2017, from $2.5 billion in 2016. Despite this 46% decrease in offshore investment in 2017, volumes were in line with the 10-year average in percentage terms, with offshore investors accounting for 16% of total sales in 2017.
Mr Rooney said, “While there continues to be significant demand from overseas institutional investors for Australian retail assets, the focus is on prime quality, core and core-plus opportunities.
“Although direct acquisitions by offshore investors declined in 2017, offshore investors contributed strongly to activity by investing indirectly into domestically-managed wholesale funds.”
Key highlights – JLL Shopping Centre Investment Review & Outlook 2018:
- The changing retail environment is driving transactions – 2017 was the second highest on record at $8.8 billion. It was a year of major transactions – the highest volume of transactions above $300m on record;
- Retail investments can continue to deliver attractive returns for prime assets, with the right tenant mix for the trade area and for assets in growing catchments;
- Asset selection will be more important moving forward, given the increasingly diverse underlying performance. The key strategy for acquisitions in 2018 will be careful asset selection;
- Opportunities for high-yield investors will emerge, particularly in the sub-regional shopping centre sector;
- Pricing – yields are starting to adjust. The divergence theme is starting to be reflected in pricing. The first signs of yield decompression in this cycle have emerged. JLL recorded softening at the lower end of the yield range in 4Q17, yet continued to record further compression at the upper end of the yield range for prime assets in certain subsectors. We expect this trend to extend to other markets across multiple sub-sectors from early 2018;
- There continues to be a strong trend towards strategic joint ventures, as investors seek liquid part-share investments in high quality assets;
- Outlook: While retail market conditions vary within each sub-sector, CBD retail is posed to outperform – particularly in Sydney and Melbourne. Retail market fundamentals are expected to be relatively stable in 2018;
- The five largest transactions in 2017 accounted for approximately 40% of total volumes, as owners are taking advantage of market liquidity to undertake major asset transaction;
- Unlisted funds were the dominant source of capital in 2017. Unlisted funds dominated acquisitions by a significant margin (acquiring $3 billion or 34% of total transactions), but AREITs were also active, albeit on both sides of the buy-sell equation, but were net buyers in 2017 after having been a net seller of assets in the five years prior. AMP Capital was the biggest buyer of retail assets in 2017, acquiring approximately $1.5 billion (excluding Gasworks Plaza). However, Vicinity Centres was the most active group during 2017, completing approximately $1.9 billion in transactions (including divestments and acquisitions).