Investors Pile into Resilient Big Box Retail

Large format retail assets are in hot demand as investors look to shore up the sub-sector’s limited supply pipeline that lies ahead.

Construction cost pressures are being pushed aside as investors eye the strong growth forecasts hitting the headlines.

Colliers attributes the large format retail (LFR) sector’s popularity to consumer sentiment and investor appetite for convenience in 2022, when $1.8 billion, or around 27 per cent of the total retail investment market, was transacted.

Colliers associate director of research Nik Potter says that with large land holdings, prominent locations and exceptional tenant and income diversity, “super regional centres have been the strongest rebounding retail assets post pandemic”.

Meanwhile, a new CBRE report shows institutional buyers accounted for 55 per cent of Australia’s large format retail acquisitions in 2022, compared to just 29 per cent of the purchasing activity in 2021, with ongoing buyer interest expected to be fuelled by housing demand, projected sector growth and a limited supply pipeline.

CBRE research analyst Darcy Badgery says Australia’s strong population growth projections will drive significant demand for housing and an associated tailwind for large format retail sales.

This could even lead to a chronic shortage, with just 711,845sq m of space in the development pipeline between now and 2026—equivalent to just 0.41sq m per additional person. 

▲ A render of the new McGregor Homemaker Centre under way in south-east Queensland.

The capital city supply situation is likely to be exacerbated by the lack of LFR centres in infill suburbs, particularly on the eastern seaboard.

“Particularly in Sydney, where the industrial vacancy rate has hit a record low of 0.2 per cent, it may be more feasible for some developers to rework proposed or existing LFR centres for industrial purposes, which will further impact the supply outlook,” Badgery says.

Declines arrested

FTI Consulting economic and financial consultant Daniel Bunting agrees, telling a recent forum held by the Large Format Retail Association that improvement in the sector’s performance has arrested the decline in new projects in the industry.

Bunting pointed to retail and wholesale construction activity as stabilising in the near term after a decade of longer term structural decline.

FTI Consulting projects that there will be more than 12 large format retail sites of more than $50 million value under construction in the next 12 months. These include the McGregor Homemaker Centre, Mt Gravatt and Brendale, all in Queensland.

Other sites are under way in Victoria, including the Leopold Homemaker Centre, HomeCo Cranbourne and Melton Homemaker Centre. There’s also a Homemaker Centre under way in Geraldton, Western Australia. 

▲ The Homemaker Centre in Geraldton, Western Australia.

A rise in rents and costs for owners of commercial spaces means those playing in this sector face rises in capital, materials and labour costs, presenting future challenges for the industry, Bunting says.

But the sector isn’t out of the woods yet. “As material costs have risen, a second wave of costs pressure is coming,” he says.

The lay of the land

There are currently 319 LFR centres in Australia with a total market size of about 5.34-million square metres of floorspace. The average size of an LFR centre is around 16,757 square metres.

CBRE’s report also notes a shift in buyers from private investors to a growing number of mostly domestic institutional buyers since last year.

There are only two LFR completions in 2024 and one in 2025 in Sydney, none in Melbourne beyond 2024, and none in metro Brisbane this year.

Traditionally a tightly held sub-sector in retail with a limited transactions per year, notable sales in the sector recently include the $282-million acquisition of Sydney’s Crossroads Homemaker Centre by La Salle Investment Management, Ashe Morgan’s $78.9-million purchase of Homemaker Prospect in Sydney, and the $265-million sale of Homeworld Helensvale in south-east Queensland to interests associated with Taiwanese-backed developer Shayher Group. 

▲ La Salle Investment Management last year paid $282 million for Sydney’s Crossroads Homemaker Centre.

Short supply is exacerbated by a number of LFR sites being repurposed to meet the shortfall of industrial space, as seen with Goodman’s $200-million acquisition of the Alexandria Homemaker Centre.

The vacancy rate for LFT assets decreased from 5.2 per cent in 2021-2022 to a record low of 3.5 per cent in 2022-2023. As such, rental rates for these assets are expected to continue to rise.

From a rental perspective, CBRE’s report forecasts that Sydney and Melbourne will maintain the highest growth rates of 5.1 per cent and 3.9 per cent respectively in 2023, supported by these cities having the highest expected intake and associated population growth.

CBRE senior director, retail capital markets, James Douglas notes that LFR assets are traditionally tightly held and rarely traded, as investors are attracted to strategic landholdings, which may offer a higher future use, transparent and reliable cash flows and higher than average expense recoveries.

Article source: Queensland Property Investor

Did you miss our previous article…