Retail sector unlikely to pass 2021’s $13.2bn in transactions but neighbourhood centres run hot

Shoppers out in force in Sydney’s Chatswood, 12km from the CBD. Picture: NCA NewsWire / Gaye Gerard

Neighbourhood retail centres are expected to draw fierce contests this year as the retail sector continues to heat up in the post-lockdown recovery.

While there is expected to be stiff competition for assets, analysts predict that the market won’t exceed the record $13.2bn of transactions recorded last year. Volumes were boosted in 2021 by a $2.2bn recapitalisation of the AMP Capital-run fund which owns Pacific Fair and the Macquarie Centre.

These themes were predicted by JLL’s annual retail investment report, which came amid a wave of new offers, including Centuria’s funds selling a portfolio of five neighbourhood centres valued at $200m via the firm.

JLL’s Sam Hatcher and Nick Willis are handling the portfolio. Mr Willis said interest in convenience-based neighbourhood centres remained elevated, but “this demand has been met with significant constraint of investment supply in 2022”.

“We have seen a shift in investor demand looking to increase weighting to the sector. However, this remains difficult in what is a highly fragmented sector,” he said.

JLL joint head of retail Jacob Swan said there were competing interests looking to enter the neighbourhood retail market.

“There are a range of institutional and private capital sources converging on the neighbourhood sector, with limited availability of high-quality centres, particularly in metropolitan locations,” he said.

“There continues to be a disconnect between book values and achievable yields to acquire assets, given vendors have become more reluctant to sell. And a range of investors are still seeking defensive investment opportunities for capital preservation in an environment vulnerable to external shocks.”

The retail market saw record investment in 2021, seeing almost three times the amount during the first year of lockdown in 2020 and 50 per cent more than 2017. Last year $13.2bn was poured into the industry by eager investors, up from $4.7bn in 2020 and the $8.8bn in 2017.

JLL’s report shows that a number of transactions over $250m were done in the last quarter of 2021. NSW accounted for $5.2bn and Queensland for $4.6bn, together making up 73 per cent of national activity.

Victoria was responsible for $2.4bn. Western Australia maintained its five-year average, with $531m in sales. South Australia was up 119 per cent at $656m.

The retail market may be crimped by looming rising interest rates, but industry was already preparing, said JLL retail research chief Andrew Quillfeldt. “Investors are now anticipating an increase in short and long-term interest rates to contain rising inflation,” he said.

“Our view is that higher interest rates will have some, albeit limited, impact on retail valuations given the capital market conditions. Debt costs are rising from a low base, gearing levels are low for institutional core capital and the spread between retail yields and debt costs remains wide. While a rising interest rate profile reflects a stronger economy and in-turn suggests a supportive environment for leasing fundamentals, leveraged households will need to reduce discretionary retail spending as mortgage repayments increase,”