Neighbourhood retail is in high demand from investors as foot traffic bounces back. Vacancies may be rising but retail investment is likely to increase through 2020 says JLL.
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Three key takeaways:
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“Anecdotally, some neighbourhood and sub-regional shopping centre portfolios collected up to 85 per cent of rent over April and May which was a very positive outcome,” says Jacob Swan, JLL’s joint head of retail investments in Australia.
Swan says the foot traffic rebound in these centres has been “fast and effective”, as workers remain at home in the suburbs.
“We are aware of many centres where foot traffic in recent weeks has been recorded at levels higher than pre-COVID-19 averages,” Swan adds.
Big W, for example, reported sales growth of 27.8 per cent up to the 23 June.
“Income was less resilient in regional and CBD centres in April which were more impacted by forced and voluntary closures and restrictions, but the increase in foot traffic in the second half of May suggests the impact will be somewhat short lived,” Swan adds.
“We’re seeing pent-up demand from consumers as they now get back out to the shops.”
Investors are becoming more optimistic about the outlook, and JLL expects that to stimulate transaction activity through the remainder of 2020 and into 2021.
Swan’s colleague and joint head of retail investments Sam Hatcher says investor demand for neighbourhood assets, primarily those under $100 million, have “held up well”.
“While private investors and syndicators have dominated activity so far this year, non-discretionary anchored retail assets in Australia are appealing to offshore institutional capital sources,” he says.
This is in part due to the “strength of covenant of the major supermarkets, their proven defensive characteristics and strong trading performance”.
Supermarkets outperformed during the peak of the pandemic in March, with monthly retail trade growth of over 23.0 per cent. There was some normalising of grocery spending in April (-17%) but sales were still over five per cent higher than April 2019.
We’re seeing a major push from offshore investors to build scale in this sub-sector of the Australian retail market,” Hatcher explains.
Foot traffic bounces back, but vacancy rates rise
While retail spending has bounced back, leasing challenges remain.
JLL’s statistics reveal the national average shopping centre vacancy rate increased to 5.1 per cent in June 2020, up from 3.8 per cent in December 2019. This is the highest level in more than 20 years.
When CBD retail and large format retail is included, the vacancy rate increased from 4.8 per cent to 6.3 per cent.
JLL Research did not count temporary store closures as ‘vacant’ for the purpose of this survey. Around 5-10 per cent of stores remain temporarily closed across Australia.
The National Code of Conduct for commercial tenancies is providing some structure to tenant-landlord rent relief negotiations for small-to-medium size operators, says JLL’s Australian head of retail for property and asset management Tony Doherty.
“The focus for some national retail chains is shifting to more permanent decisions for rationalising their store numbers.”
As discretionary retailers shrink their store network, this will “likely polarise” the retail property sector further and drive divergence between prime and secondary assets, adds JLL’s senior director of retail research Andrew Quillfeldt.
Commencement of new projects and extensions are at their lowest since 2009 at just 22,900 sqm in the second quarter. Each of the six projects that proceeded in the June quarter were convenience-based centres anchored by a supermarket.
Development activity is now focused on converting existing space.
“We’re expecting to see an acceleration of the alternate-use conversion theme as owners look to extract value from retail assets, whether it’s a partial or full conversion,” Quillfeldt says.
Meanwhile, NAB figures show Australia’s e-commerce penetration rates continue to hit record highs – with 10.3 per cent for May, off the back of 10.4 per cent in April. Projections for Australia’s e-commerce growth were previously expected to reach 14 per cent within five years, mirroring the United States’ growth trajectory.
JLL says this will add to the pool of online shoppers and fuel the industrial and logistics market in Australia.