Retail transaction activity reached the third highest level on record in 2018 ($8.1 billion). Owners are focusing on reducing exposure to low-growth assets and redeploying capital into new acquisitions or redevelopment projects.
AREITs and private investors continue to be the major sources of investment product but both groups were active on both sides of transactions, with total acquisitions largely offsetting disposals in 2018. With the exception of two major acquisitions by Scentre Group and SCA Property Group, which drove most of the activity, AREITs were highly selective towards new purchases. Unlisted funds continued to dominate acquisitions and we expect that more retail assets will transfer from listed to unlisted ownership as AREITs continue to refine their portfolios in 2019.
Source: JLL Research
Investors are becoming more cautious towards retail fundamentals, particularly regarding income sustainability and capital intensity, and are increasingly pricing-in uncertainties. Some opportunistic investors are likely to review strategies towards the retail sector with a view to capitalise on the adjustment in values, especially if the yield spread widens to other sectors.
Offshore investors have been less active than in previous years but acquisitions are still high by historical standards in value terms. We expect that offshore investors will continue to look for suitable major retail opportunities in Australia given the tight planning system, low supply pipeline, high population growth, high average household wealth and stability of retail returns.
The short term outlook for retail is linked to wage growth. A recovery in wage growth has begun and retail turnover growth has started to accelerate (July 2018 to November 2018). However, subdued housing market conditions may offset the impact of an improvement in household income in the short term. Over the long term there are some highly supportive demographic trends beneath the headline figures. For example, over the next ten years the largest cohort of the population will be reaching their peak earning and spending age.
Shopping centre owners with the strongest retail expertise will continue to outperform and extract value by implementing strategies to attract tenants and customers. Owners (primarily AREITs) are likely to focus on smaller, more refined, portfolios of retail assets to maximize returns for their investors.