Investor interest in super-neighbourhood retail to intensify

The traditional hierarchy of retail centres is being turned on its head as fresh research from JLL finds yields between sub-regional and neighbourhood centres have converged and investors reassess their assets.

Historically, sub-regional centres have enjoyed a reputation as a safer investment proposition, typically selling on tighter yields than their neighbourhood counterparts. But as neighbourhood shopping centres emerge as preferred shopping destinations for time-poor consumers, they are increasingly attractive investments. 

Peri Macdonald, Frasers Property Australia’s executive general manager for retail, says population growth and increased density in inner city catchments are “giving rise to greater demand for new forms of convenience retail, as more health and lifestyle uses emerge and demand for food and retail services increases”.

New JLL research finds investor demand and competition for neighbourhood shopping centres has been strong since 2014, driven primarily by private investors. The competition for neighbourhood centre assets has resulted in capital value growth and yield compression in all retail formats, but more so in the neighbourhood category. 

“A range of factors – demographics, location, management quality and tenant mix – are all key drivers of value at the individual asset level,” says JLL’s director of strategic research, Andrew Quillfeldt.

“Increasingly these factors dictate value rather than the simple categorisation of a centre. This reassessment of the retail sector creates opportunities for centre owners and active managers to add value by re-positioning their assets.” 

Quillfeldt says owners of sub-regional centres have been actively driving rental growth by changing the tenant mix towards more food and beverage, retail services and convenience uses – categories which typically pay higher average rents than other uses, such as apparel, and bolster the performance of shopping centres over the longer term.

The lower price point makes neighbourhood centres accessible to a wide range of private investors seeking yield. The non-discretionary nature of tenancies often operating in neighbourhood centres also offers stability of income. 

Macdonald points to a “distinct opportunity” for the emerging super-neighbourhood class of shopping centre – one which “mirrors the locally-curated tenancy mix of neighbourhood centres on a size scale similar to sub-regional centres”.

Investment interest in the neighbourhood and super-neighbourhood sector is expected to intensify, Macdonald adds, as “planning regulations increasingly embrace more integrated and mixed-use forms of development, both in inner-city areas as well as for greenfield town centre sites”.

JLL says the yield cross-over between sub-regional and neighbourhood assets is the “first on record”. While it is too early to know whether this is a permanent shift, it is evidence that investors are re-assessing neighbourhood centres that have historically traded at a discount to other retail formats.