Investors shop for neighbourhood retail

As changing consumer demand continues to reshape the retail landscape, one sector is increasingly inspiring confidence in retailers and investors alike: neighbourhood shopping centres.

Innovations in e-commerce coupled with a new generation of consumers has seen traditional retailers forced to adapt and retail investors rethink strategies around brick and mortar stores.

But amidst this state of flux, the resilience of non-discretionary based retail is prompting growing investor interest, says Nick Willis, director of retail investments, Australia, JLL.

“While other retail sub-sectors are experiencing varying levels of investment interest, private investors and syndicates, as well as offshore capital with local management partners have all been bidding in this segment of the retail market to achieve scale as well as the attractive risk-adjusted returns it offers,” he says.

In Australia, neighbourhood centre investments made up 21 percent of total retail transactions, with 48 percent of those purchases made by private investors and syndicates - an increase of 14 percent on 2018, according to JLL data.

“Investors are being drawn to the fundamentals of these shopping centres, which typically offer irreplaceable landholdings, excellent connectivity to consumers and long term development potential,” says Willis.

However, a 30 percent year-on-year decline in activity in value terms reflects one of the biggest challenges investors face: a shortage of assets to buy.

Despite this, investment activity picked up across the retail sector in the second half of 2019 due to pent-up demand – especially from private buyers - and more attractive pricing, which bodes well for 2020, says Jacob Swan, joint head of national retail investments, Australia, JLL.

“Notably in the past six months we have seen a real shift in investor demand towards neighbourhood centres from both local and offshore privates and larger institutions looking to get scale, given their defensive non-discretionary nature and annuity style return.”

Clicks v bricks

When it comes to grocery retailing, clicks are not about to replace bricks any time soon.

Of respondents surveyed for the Nielsen 2019 Shopper Trends report, 83 percent had spent more time in supermarkets and hypermarkets than any other type of retail locale. This increased from 80 percent the previous year, the result attributed to the high sensory experience and convenience of supermarkets.

The sentiment is supported by research from research company IGD, showing that the world’s 20 leading grocery markets, where groceries are predominantly sold in food-led retail outlets, will generate an additional 28 percent, or US$1.9 trillion, in sales between 2018 and 2023.

And a growing middle class, means that nearly half (44 percent) of the extra sales will be created in Asia, adding more than Africa, Europe and Latin America combined.

In Australia, which is among the 20 leading markets listed by IGD, supermarket spend accounts for the largest portion of total retail turnover at 41 percent.

The outlook is likely to continue to stimulate investor interest for suburban shopping centres, says Georgia Mack, senior analyst, retail research, JLL.

“With supermarkets as anchor tenants of neighbourhood centres, demand remains strong for these assets, particularly those located in metropolitan areas with long-term development potential.”

Supermarkets respond

Significant investor interest in neighbourhood retail has prompted major supermarket groups in Australia to review the ownership structures of their stand-alone neighbourhood centres.

Woolworths Group, which is Australia’s largest supermarket chain, has plans to raise about AU$130 million in a sale and leaseback arrangement involving four sites dotted across Australia.

Investor interest has prompted the decision, according to a Woolworths spokeswoman quoted in the Sydney Morning Herald.

"While the property market remains strong and appetite from financial investors continues, we have the opportunity to sell four strong performing quality neighbourhood shopping centres. These centres will be marketed individually,” she says.

Meanwhile, European supermarket group, Aldi, is looking to raise about AU$700 million through the sale and leaseback of a portfolio of its distribution centres across the country.