More retail assets likely to come to market as transactions rise

The retail sector has started the new year with a flurry of activity and there could be more assets coming to market this year, according to an expert.

Ray White Commercial Head of Research, Vanessa Rader, said 2023 was a challenging year for retail and 2024 could see more of the same, leading to further investor selling.

“After a quiet 2023, with many vendors unable to accept the new levels of yield, 2024 has commenced with a flurry of sales at refreshed yield levels, which may signal a revitalisation of activity for the asset class,” Ms Rader said.

Ms Rader said that the rise of online shopping combined with the fallout from government-imposed lockdowns during Covid had changed the landscape for many retailers.

“The retail sector has been in a state of limbo for a prolonged period,” she said.

“The threat of online shopping, the pandemic, and increases in vacancies hindering returns, all aided in putting retail on the backburner for many buyers.

“Upon the onset of COVID-19, lockdowns and other trading roadblocks made it particularly difficult for the retail sector, fuelling the swift upward trend in online retailing, both for food and non-food items. 

“This upward trend catapulted the online phenomenon, however, the low cost of finance and competition between eager investors saw yields remain low despite these shifting fundamentals and, in turn, investment returns again improved.”

She said that despite challenges there have still been some strong recent sales.

“Stockland Nowra was one of the latest sales with a reported yield at around 8 per cent,” she said.

“This is far from the 6.5 per cent capitalisation rate attributed to their FY23 valuations, which was even lower in prior years,” she said.

Ms Rader said that as the retail sector continued in this state of restructuring, the rise in finance costs had considerably impacted the demand to purchase and what the acceptable yield level was for both vendors and purchasers. 

“For retailers, the last few years have been a time to consider their online platform, question their need for a physical presence, and rethink their overall offering,” she said.

“Looking internationally for some direction, including the use of AI and automation, Australian retailers are still grappling with what the ideal template is, particularly given inflationary pressures tightening the belt of many Australians.”

She said while online pressures may have moderated, overall sentiment towards retail continues to be down, uncertainty has caused rising vacancies and for some markets, this has translated into broader pressure on rents and incentives lowering income returns. 

“This trend has been a feature of the market over the last 12 months and there are expectations of further falls into negative territory for all centre types in 2024,” she said.

“With book values anticipated to continue to fall, we expect to see 2024 to be the year for retail, with greater assets coming to market and private investors taking up the challenge of repositioning assets in this new landscape.”

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