Quality retail piques investor interest

Sep 28th, 2015

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Article by:
Dan Wilkie

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While storm clouds gather over office assets and land development comes off the boil, interest in retail property is building as investors look for somewhere secure to park their cash.

A DREARY winter's day was not enough to stop investors packing a marquee in Bayswater last month, with more than 60 people turning up for the auction of a small retail property on Guildford Road.

The property sold for more than $1 million over the reserve price, with seven genuine bidders emerging from the eager crowd that had gathered for the auction undertaken by CBRE.

Anecdotes like that are becoming common in Perth property circles, with retail properties across the city increasingly generating interest from investors.

The selling agent for the Bayswater property, CBRE's Ben Younger, said there was simply not enough quality investment stock available to keep up with demand.

"There are definitely people with money and they want to put it in quality investments," Mr Younger told Business News.

"In general terms, the retail sector is very strong, while the office and development markets aren't.

"People know they can get a good return and the three key factors are location, quality of tenant and length of tenure.

"That's what the market wants and they'll push the limits to get it."

Colliers International director of retail investment services Mark Werrett agreed that there was a big pool of money in Western Australia chasing retail property.

Mr Werrett said the neighbourhood shopping centre market was particularly competitive, with every property Colliers had taken to market in the past two years generating more than 100 genuine inquiries.

"For the last four or five properties, that's resulted in 10 to 15 actual bids," Mr Werrett said.

"In my career I've never seen that sort of response.

"It just seems to me that there's a real big pool of money out there.

"With the outlook being that interest rates are going to stay down, retail is very attractive for investors."

Earlier this year, Primewest director John Bond told Business News that retail properties, particularly key neighbourhood shopping centres, were considered an extremely secure investment.

One reason for this, Mr Bond said, was that an anchor tenant such as Coles or Woolworths generally contributed more than 50 per cent of a centre's income, and those supermarkets were typically on long leases.

"You're also not exposed to discretionary spending much," Mr Bond said.

"They typically don't have clothing stores in them these days; they've become more service centres."

He said Primewest, which is the second-largest WA-headquartered shopping centre owner by total square metres owned (see table page 13), set up a $100 million shopping centre trust last year, a trust that was keenly sought after.

"What we like about those is we get a diversity of assets across states and a diversity of different tenants," Mr Bond said.

"It's all about mitigating risk and providing security for investors."

Another property syndicator, APiL, recently launched a trust, with a minimum investment caveat of $5o,ooo, to acquire the Champion Drive Shopping Centre near Armadale.

APiL managing director Peter Hughes told Business News that, on the day of its launch, the trust was announced at 2:30pm and filled by the end of the day.

The centre was bought for $13.5 million and achieved an initial yield of 8 per cent.

However, Mr Hughes said the strong demand from investors keen to get a slice of syndicates was actually causing issues for APiL.

"With smaller properties, under $20 million, you're scaling back investment contributions and some people aren't even getting a look-in," he said.

"We've also got another problem; we've just sold a property in Sydney and we've got another $40 million coming back to investors.

"Primewest have sold quite a bit of their portfolio, too, so both of us are in the same boat; we've got money everywhere and nowhere to put it."

Mr Hughes said the attractiveness of retail property for both APiL and the investors in its syndicates was the reliability of the income produced.

"We're out of the Perth office market and our focus is on retail because we get substantial tenants, long leases and although the yields aren't as high as we'd like, they're certainly very competitive in the financial markets," he said.

"Shopping centres aren't going to go away. We take a view that neighbourhood centres provide convenience, and most of our centres have a major tenant and mostly food-related or services tenants.

"You can't get a haircut off the internet and you can't get fed on the internet. You can get it delivered off the internet, but the internet won't feed you."

The security of retail property has also drawn major investment from cashed-up players historically absent from the sector.

In the past 12 months, Perdaman Industries founder Vikas Rambal has made two major shopping centre purchases - the Northam Boulevard, which was bought for $14 million, and the under-construction Port Coogee Shopping Centre, which Mr Rambal is understood to have purchased from Frasers Property Group, formerly Australand, for an undisclosed sum.

Iron ore entrepreneur Tony Poli is another who has dipped his toe in retail property, with his newly established Aigle Royal Developments buying a vacant site earmarked for a neighbourhood shopping centre in Wattle Grove for $2.6 million in February.

Aigle Royal is also understood to be close to finalising a deal to buy another development site in Singleton, for around $8.2 million, where a Woolworths supermarket and associated shopping centre is expected to be built.

Another Perth-based player who beefed up his retail portfolio in the past 12 months was Armadale Central owner Gerard O'Brien.

Mr O'Brien is understood to have bought the Woolstores Shopping Centre in Fremantle in December last year for $40 million, following that up with the $13.6 million purchase of the Millstream Shopping Centre in South Perth in April.

Those purchases placed Mr O'Brien in the top five locally based shopping centre owners in the state.

Major backing

But it's not just the locals backing the prospects of retail property in Western Australia.

All of the major institutional owners, plus Perth-based Perron Group, are advancing plans for massive expansions of the city's regional shopping centres.

AMP Capital has outlined plans to spend $L35 billion adding 47,000 and 53,000 square metres to its Garden City Booragoon and Karrinyup Shopping Centre, respectively.

Scentre Group is also planning to redevelop its Westfield Innaloo, Westfield Whitford City and Westfield Carousel shopping centres, with those expansions plans collectively worth $1.12 billion and totalling more than l36,000sqm of extra space.

Federation Centres has plans to add 20,000sqm to Mandurah Forum at a cost of $350 million, while it also expects to expand Galleria Shopping Centre in Morley, which it co-owns with Perron Group, by 20,000sqm, for a $450 million spend.

Perron Group, WA’s biggest local shopping centre owner, is planning a $300 million expansion of Cockburn Gateway Shopping City; but that redevelopment hinges on a $290 million road project to alleviate traffic congestion around
the already crowded centre.

As reported by Business News earlier this month, the federal government has committed to funding the Armadale Road portion of the Community Connect South project. However, the crucial link for Cockburn Gateway, a new bridge over Kwinana Freeway, has not received a commitment.

Nevertheless, Perron Group chief executive Ross Robertson said there was significant demand for more retail space in Perth.

"Defined caps on the size of centres, together with no seven-day trading, has certainly resulted in WA retail expansion lagging the nation," Mr Robertson told Business News.

"With both of these limitations removed we believe there is sufficient latent demand within the Perth retail market, however, there will be more competition in the future as centres fight for market share."

A shared aspect of all the redevelopment plans at the city's major malls are the creation of entertainment precincts, providing consumers with the option to eat, drink and play at shopping centres, rather than just shop.

Mr Robertson said that was particularly evident at Cockburn Gateway, where the centre experienced significant trade outside of normal retail hours, due to a popular strip of restaurants on the outside of the centre.

"Creating a point of difference is critical in attracting and retaining customers," he said.

"Designing shopping centres around town squares, gymnasiums, medical uses or entertainment facilities helps turn them into a destination in themselves.

"Place making has the potential to change shopping centres from being primarily commercial hubs into places where people also gather as part of their community."

The chief executive of WA’s third-largest local shopping centre owner, Hawaiian's Russell Gibbs, said his company had also steered away from the traditional shopping centre format in favour of establishing them as community
hubs.

He said that strategy had been in place at Hawaiian since 2010.

"With the number of redevelopments taking place across Perth there is no question the current market is competitive,
which means that there has been a power shift," Mr Gibbs said.

"We are in a time that the shopper is now holding more and more power over decision making and the direction the retail world is moving in.

"That's why we operate as we do; we know that when you work with our community, with your shopper, and listen to what they are saying, that it gives us the knowledge of how to deliver success to our retailers and in turn ourselves."

Lease Equity managing director Jim Tsagalis said the other key element of the major shopping centres' expansions was a race to sign up big box international fashion retailers such as Zara, Topshop, and H&M.

Zara has already set up shop at Booragoon Garden City, while the recent opening of H&M at Lakeside Joondalup Shopping City caused much fanfare in the northern suburbs.

"With the development of these shopping centres, they will be anchored in a less traditional way for Australian shopping centres," Mr Tsagalis said.

"Historically, they were a discount department store, a supermarket, then at the regional level, a department store.

"That narrative has changed… if one could procure three or four of the international big box fashion retailers. you could potentially get a greater per square metre turnover and therefore a greater attraction than you would from a
department store.

"The interesting part of it will be, whoever gets it done first may possibly be the winner."

View the complete Business News Retail Property feature here

Source: Business News - 28th September 2015

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