The supermarket wars move to housing: Why Coles and Woolworths are building units

Woolworths is best known as the fresh food people, but did you know the supermarket giant is also building homes?

Woolworths has been developing apartments on top of its stores in Sydney, Brisbane and Melbourne in response to what is says is changing shopping attitudes.

But while customer convenience is part of the equation, it also allows the supermarket to literally create customers out of thin air – as record migration and a return to the office boosts demand for inner city apartments.

So, could it be another solution to Australia’s worsening housing supply crisis?

What a supermarket housing development looks like

Across Sydney, Woolworths has several mixed-use developments projects underway, varying from a proposed 124 apartment complex in Waterloo on the city fringe, to a boutique project of 14 apartments in exclusive harbourside Rose Bay.

Woolworths has also gained approval to build a new supermarket and apartments on a vacant site in Kangaroo Point in Brisbane, while in Melbourne, the supermarket chain has also received development approval for a 139-apartment project in the inner-city suburb of Elsternwick.

Woolworths is proposing to develop 124 apartments above its supermarket at its Waterloo mixed-use project in Sydney. Picture: supplied

Woolworths is looking to sell the Melbourne project to a property developer and secure a lease back for the supermarket space, as it does with other projects.

Morningstar equity analyst Alex Prineas said Woolworths and other retail businesses had been building their own supermarkets and other commercial buildings for years, but were typically more interested in selling the properties rather than owning them in the long term.

“Property development isn’t a major strategy for Woolworths,” Mr Prineas said.

“Typically they will develop a new supermarket and they will own it for that period, but once it’s an operating site, they will often sell it on to a real estate investment trust (REIT) or other landlord and become a tenant with a long lease on the retail space.”

But Mr Prineas said adding homes on top of their supermarkets was a benefit for the supermarket chain since those residents were more likely to shop there and become regular customers.

Woolworths managing director of property Ralph Kemmler told realcommercial.com.au people are seeking greater convenience in how they shop and access services.

“New developments must speak to these trends and deliver sustainable outcomes that increase liveability for these communities,” Mr Kemmler said.

“Our mixed-use developments are an example of responding to the changes we are seeing in our cities and the urban lifestyle people are demanding. Our developments mix the new supply of quality apartment living with key services, supermarket retail and community infrastructure.”

Implications for the housing market

Proptrack economist Anne Flaherty said adding high-density housing into mixed-use developments was a good outcome for the broader housing market.

“One of the most important considerations when it comes to building where people want to live is access to good retail amenity, so being close to a supermarket will be appealing for residents.”

“Supermarkets take up large amounts of land and given the scarcity of land, developing upwards on these sites will maximise the use of that land.

“We have an undersupply of housing, so anything that can be done to maximise the number of dwellings is beneficial.”

Woolworths’ Rose Bay mixed-use project will feature about 14 boutique apartments across two levels. Picture: supplied

The supermarket wars spread to housing

Supermarket rival Coles has also been working on several mixed-use developments, selling a mixed-use development site in Sydney’s Caringbah earlier this year, and lodging plans for a new mixed-use project in the Neutral Bay area.

A Coles spokesperson said they continued to focus on property developments where there were good retail and supermarket outcomes.

“We do some development partnerships and have delivered within mixed-use spaces, which is generally inner metropolitan areas and includes apartments, offices, medical centres,” the spokesperson said.

Woolworths reduced its initial building height plans for the Neutral Bay mixed-use project after community opposition. Picture: supplied

But taking on property developments is fraught with risks, with the supermarket giants facing many of the same hurdles as traditional developers.

Woolworths has faced fierce opposition from local residents surrounding exceeding building heights and other factors, most notably at its Elsternwick and Neutral Bay projects.

The group was forced to reduce the building heights among a list of changes to garner the support of the community and local government.

In Neutral Bay, Woolworths reduced the building heights by 30% to bring the complex into line with others in the area.

But Woolworths says having control over the development outcome of mixed-use developments can put the customer and community at the heart of the decision making, as opposed to being solely driven by residential development objectives.

“These developments ensure people can shop, work and enjoy themselves all within a close proximity to where they live,” Mr Kemmler said.