2016 was a positive year for the Australian retail investment market – total transactions reached AU$7.3 billion, the fifth consecutive year in which volumes exceeded AU$5.0 billion, according to the latest JLL Australian Shopping Centre Investment Review & Outlook (ASCIRO) report.
Investor demand remains strong for core and core-plus assets, with offshore investors making a strong showing for acquisitions, accounting for 32 percent of transactions over the year.
“Investor demand outweighs the supply of investment-quality product, and the pent-up demand has compressed yields,” says JLL’s Australasian Head of Retail Investments, Simon Rooney. “Investors are gradually resetting their expectations to reflect a lower growth and lower return environment.”
In 2016, retail investment transactions by offshore investors reached AU$2.3 billion, just shy of the AU$2.5 billion recorded in 2015. Over the past five years, investors from the Unites States (51% of acquisitions by offshore buyers) and Asia (42%) have dominated the roster of foreign investors seeking Australian retail assets.
“Despite the popularity amongst U.S. investors, there is renewed interest in the Australian retail sector from European institutional investors and pension funds,” Rooney says. “With debt remaining cheap, global multi asset-class investors continue to reallocate equity towards real estate – in particular, defensive property sectors such as Australian retail.”
“We believe transaction activity will reach a new record high in 2017 as investors capitalise on the current favourable market conditions. With owners continuing to reweight portfolios, liquidity remains high in the retail market.”
“On the other hand, the high level of asset turnover provides opportunities for investors to access large, traditionally tightly held assets and/or portfolios.”
“Transactions are likely to be led by offshore investors again in 2017 as they seek opportunities to reach their target allocations.”
Several factors are driving offshore interest in Australian retail centres:
- Exchange rates: the depreciated Australian dollar makes the market attractive, particularly when compared to many developed and emerging countries
- Stability & transparency: Australia’s stable economy and highly regulated, transparent investment processes make due diligence easier and gives confidence to offshore investors
- Scale: in recent years there have been many opportunities for investors to complete major transactions, either as individual assets or as portfolios
- Experienced players: access to professional institutional managers in Australia is a significant consideration for major offshore investors
“The quantum of offshore capital seeking retail opportunities in Australia is higher than it has ever been. Australia still looks very attractive to offshore institutional investors because it is considered to be a low-risk destination,” Rooney says.
According to the ASCIRO, the outlook for the retail market in 2017 and beyond is encouraging.
GDP growth is starting to rebound, driven by rising household consumption and private investment.
Although retail turnover growth slowed over 2016, this was partly attributed to the low-inflation environment.
“Over the medium-term, a number of factors will be supportive of retail turnover growth,” Rooney says. “Net wealth is now back above 2007 levels and the household saving ratio is trending down.”
Retail turnover growth will also be stimulated by an acceleration in wage growth between 2017 and 2019, as forecast by Deloitte Access Economics, which predicts retail turnover growth (inflation-adjusted) to increase from 1.9 percent in 2016 to 2.1 percent in 2017 and 3.0 percent in 2018.