Large format retail is emerging as one of the most sought after asset classes, with an increase in surge in offshore investment in 2016 helping drive sharp yield compression in the sector.
CBRE’s latest Q4 Retail MarketView highlights that large format retail centre yields compressed faster than any other asset class in 2016, averaging 60 basis point compression to 7.6% from 8.2% in 2015.
CBRE National Director of Retail Investments Mark Wizel said the yield compression was being driven by the lack of shopping centre stock on the market.
“Investors want exposure to retail and with shopping centre stock levels 27% down on last year, large format retail centres are in high demand,” Mr Wizel said.
Prior to 2016, the majority of demand for large format retail was from local private investors and A-REITs, however, over the past 12 months there had been a significant spike in interest from offshore groups.
Highlighting the trend was the sale of Sunbury Showrooms last year for $14,880,000, with 22% of enquiries received in the asset from offshore investors.
“Offshore Asian investors are becoming much more prominent in the retail investment space – including large format retail. Four of the five last retail investment transactions in Victoria have sold to offshore Chinese buyers,” Mr Wizel said.
“The Sunbury Showrooms, which transacted for a record low yield of 6.52%, represented the first Victorian large format retail centre purchased by an offshore Chinese investor – a potential indicator of the interest expected over the coming two years.”
Mr Wizel attributed the appeal of large format retail assets to their typically strong tenancy covenants that offer fixed annual rental uplift and increasing tenant diversity.
CBRE’s Head of Large Format Retail Chris Parry said adding to the demand in the sector was tenant performance, with a boom in home renovations driving a wave of growth in household goods.
“Higher house prices and the lower interest rate environment sparked a surge in home renovation activities, with people increasingly opting to upgrade their existing home,” Mr Parry said.
“This has supported a strong base for retail growth in the household goods sector, with many operators looking to expand with either larger stores or additional outlets in new locations.”
Mr Parry said the strengthening household goods market was further fuelling investment activity in the sector.
“With more major national tenants committing to centres across the country, we’re seeing greater interest from investors looking to expand their portfolios beyond traditional asset classes to include large format retail,” Mr Parry said.
“Furthermore, the security of these major tenants provides confidence to invest in non-core locations, including regional areas that have a population base to support strong trading.”
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