Sydney resets the focus for retail investors
The gap between Sydney and Melbourne’s retail property yields are closing and will fall in favour of the New South Wales capital over the next three years.
LJ Hooker Commercial’s Retail Market Monitor said the shift in yields would come about from NSW regaining the mantle for retail turnover from Victoria this financial year, and the southern state unveiling a 30% increase in retail commencements for a new post-GFC record.
Victoria recorded 4.7% retail turnover growth in the 12 months to August – well above the 3.5% national average – but it’s expected to moderate in coming years. The Monitor declared NSW – which recorded 4.3% growth - would reset the national pace for retail growth after surging house prices bolstered the perceived wealth of Sydneysiders and public infrastructure spending spurs investment.
The Monitor predicted NSW would average 4.5% growth to the end of FY18-19, further heightening demand for retail assets which saw the value of sales increase from $2.3 billion in FY15 to $4.2bn in FY16 – a new record.
LJ Hooker’s Head of Commercial, Christopher Mourd, said retail investment was set to be a key feature of Sydney’s market over the next 36 months, with yields likely to tighten from regional shopping centres through to strata and strip assets.
“Sydney lost the mantle for retail turnover to Melbourne recently, but we’re going to see the pendulum swing back over the border in the next three years,” said Mr Mourd. “Private wealth from residential (property) growth and public infrastructure will fuel spending habits, and that has already influenced the spike in retail investment sales in the last year.
“The ramping up of retail acquisitions will be a feature for investors across the board in 2017. Institutions will continue pursue high quality assets with a proven track record while private investors and syndicates will continue to search for neighbourhood centres and strip retail shops in developing communities.”
Over the last 12 months, some retail assets in Sydney have firmed 70bps. Sales of Sydney’s regional centres averaged yields of 5.5% while neighbourhood centres averaged 6.9%. However, competition was marginally stronger in Melbourne which averaged 5.4% and 6.6%, respectively.
In Sydney’s CBD, the recent Scentre Group and Cbus purchase of the David Jones Market Street store for $370m was a standout result, while in outer suburbs, Marketfair Campbelltown recently attracted a price of $48m.
LJ Hooker’s Head of Research, Mathew Tiller, said refurbishment would be a common denominator amongst major landlords in 2017, especially in Victoria.
Major retail construction activity in Melbourne has included the $670m remodelling of Chadstone Shopping Centre and an $85m expansion to the Gateway Plaza Leopold. Other plans include the Victoria Market redevelopment ($250m) and expansions to The Glen ($450m) and Knox Westfield ($450m) regional shopping centres.
“We’re in the midst of a very active period where landlords are positioning their assets with long-term views,” said Mr Tiller.
“The recent purple patch of residential development has heightened demand for new and updated retail facilities.”
Mr Tiller said while many markets would experience a reduction in residential construction, the lower Australian Dollar would provide a safety net for retail tenants.
“And with the White House transition in January next year, we could see the Dollar fall further, encouraging more people to stay and shop domestically,” he said.
“Tourism centres will perform well over the coming period. Queensland’s retail sector is already enjoying an improved performance with $2.7bn in transaction in FY16 – ahead of Victoria.
“Indeed, Queensland will outperform the national average in the coming three years and that has had an influence on sub-regional and neighbourhood centre yields now matching 2007 levels.”
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