Why Large Format Retail is in demand and delivering market-leading returns

Australian Large Format Retail (LFR) has flourished over the past 10 years, and the sector is forecast to continue to attract investors with booming spend, low supply and rent growth underpinning the sector, a new CBRE report shows.

CBRE’s Large Format Retail Outlook report shows LFR has seen sector-leading investment returns of 12.8% pa over the past 10 years supported by cap rate compression and rising rents. The report forecasts investment returns could be ~11% pa to 2030.

The LFR sector includes occupiers like Bunnings Warehouse, Harvey Norman, Repco but more recently pet products and gyms have moved into the space.

The report shows the top 20 occupiers have over 3,250 stores nationally with 33% of space take-up by furniture shops, 19% by hardware/garden and 12% by electrical and 11% by homewares.

CBRE’s Head of Research, Pacific, Sameer Chopra notes unlike many other sectors, LFR benefits from minimal incentives, helping to sustain a strong income yield.

“Looking ahead, we forecast investment returns are likely to average nearly 11% pa supported by strong income and rent growth. Our forecast is for mid-single digit rent growth, led by Brisbane and Perth. There is also scope for modest cap rate compression of ~10bps over the next three years,” Mr Chopra added.

The report highlights LFR categories account for between 20% and 25% of all retail sales with spend on household goods increasing at mid-single digits over the past 10 years. Furnishings account for 27%, Electronics 37% and Hardware 36% of spend.

CBRE’s National Director, Retail Capital Markets, James Douglas said, “LFR assets continue to be tightly held and rarely traded, with investors attracted to the strategic landholdings that these centres typically occupy and the potential for future development. They also offer transparent and reliable cashflows, with strong in-built rental growth and high expense recoveries, providing a sustainable base for income growth.”

Australia’s GLA sqm per capita for LFR is 0.22 sqm which is around 1/3rd of the US. 
Sydney, Canberra and Regional QLD, NSW and VIC are the most under-penetrated markets. and the report notes most Australian cities are likely to benefit from outsized population growth over the coming decade.