Neighbourhood retail is the standout

Interest rate rises and global inflation have resulted in a slowdown in discretionary spending during the past 12 months, while the inverse is true for non-discretionary investment.

In other words, people are spending more on necessary items such as groceries and less on items that are nice to have such as clothes and footwear.

Research from JLL shows that in Western Australia, discretionary spending in the year to June was at $18.27 billion, while non-discretionary spending reached $28.52 billion.

This means non-discretionary spending accounted for 61 per cent of the $48.79 billion spent on retail goods in WA.

The real estate group found that year-on-year growth of both categories was equal this year, at 6 per cent in WA.

Discretionary spending peaked in May 2021, with a year-on-year growth rate of 18.5 per cent, while non-discretionary retail declined from 15.6 per cent in February 2021 to negative growth 12 months on.

JLL director real estate economics Ronak Bhimjiani said the sharp decline in non-discretionary retail in that period was linked to the stocking up of essential items during COVID, after which that growth rate declined naturally as consumers were able to normalise spending.

“Discretionary spending has remained elevated; however, the trend is on a downward trajectory, due to cost-of-living pressures,” he said.

“We can expect this trend to continue whereby discretionary spend continues to trend lower while non-discretionary spend trends at a pace matching population growth and inflation.”

The trend towards non-discretionary spending has been welcome news for owners of neighbourhood retail assets.

These assets include smaller suburban shopping centres.

Research by Colliers released earlier this year showed a significant increase in neighbourhood transactional volumes in 2022, with eight centres sold in WA for a total of $207 million.

This compared with five transactions the previous year, valued at $92.1 million.

Transaction activity has slowed considerably this year, with the two major purchases being from national property fund Centuria Capital Group, which bought neighbourhood centres in Margaret River and Busselton for $15 million and $16 million respectively.

Colliers chief executive Richard Cash said transaction activity was subdued for several reasons, including that escalating build costs meant there was very little new stock coming to the market.

“The challenge we’ve got is private developers, who build them (shopping centres) to turn them over and sell them, haven’t been as active, and Woolworths and Coles also haven’t been as active,” he said.

Industry experts also talk about a disconnect between buyer and seller expectations in relation to what these assets are worth, with the increased cost of debt pushing yield projections upwards.

Given that an increase in yield generally correlates with a reduction in value, many of these assets may not be valued at the price a vendor would be willing to receive.

Mr Bhimjiani said yields were increasing across all commercial property assets due to the cost of debt as well as concerns around the global economic outlook.

But, he said, neighbourhood assets would be less exposed to this valuation decrease.

“The movement at which [yields] are moving higher very much depends on what type of tenants are in your stores,” he said.

“If you’ve got a neighbourhood centre anchored by a major supermarket … these assets, lower down the risk curve, are actively sought after, due to their stable income stream.”

He said larger discretionary-based centres were more difficult to assess due to the lack of transactions in the WA market in recent months.

“Regardless, some of the larger centres would appear higher up the risk curve due to the larger share of discretionary based tenants,” he said.

Bruce McCully says Centuria positions itself as a buyer of retail assets in this market. Photo: David Henry

IGA Centre in Midland is about to settle for $19.25 million at a 6.4 per cent yield and Port Hedland Boulevard Shopping Centre is set to transact at a 9 per cent capitalisation rate.

Australian Unity is also selling Woodvale Boulevard Shopping Centre, with the asset believed to be in due diligence at a 6.5 per cent yield.

Colliers’ research stated that WA had the highest per capita rate of retail spend at $16,489, in the year to May 2023.

This compares with the national figure of $16,016.

Australian Bureau of Statistics data show a pullback in discretionary spending, which was up 6 per cent in the year to June 2023, down from 10.9 per cent over the prior 12-month period.

ABS’ recent monthly retail trade report showed a 0.5 per cent increase in retail turnover nationally and a 0.4 per cent dip in WA in July.

Online sales nationally had declined from a peak of 15 per cent of all retail turnover during the pandemic, to 10.9 per cent this year, Colliers found.

Industry focus

Hawaiian owns 11 shopping centres across WA, predominantly in the neighbourhood space.

Chief operating officer Richard Kilbane told Business News the property fund had placed neighbourhood retail at its core for its three-decade history.

“It’s basically our bread and butter,” he said.

“Our first assets were Bassendean Shopping Centre and Noranda Shopping Centre, so we’re used to the way these assets perform over time … and the nuances that come with them.”

He said over the past 12 months, the company focused on restoring its neighbourhood assets to how they were before COVID.

He said ‘foot traffic’ had increased across all the group’s suburban centres, after a decline during the pandemic, and sales were strong.

“Part of that can be attributed to inflation, but we also like to think that the way that we’re promoting our centres, the fact that they’re essentially full, that we’ve got good tenants, that those things are strong contributors to why more sales are passing through the centres on a yearly basis,” he said.

Over the next 12 months, Hawaiian is adding 26 new food, retail and service tenants to its neighbourhood centres, including Community Coffee and Rocky Ridge Brewing at Duncraig.

“That speaks to the idea that in your local shopping centre there are other things to do rather than just your normal supermarket shop but there are places you can come to hang out and enjoy,” he said.

The company recently gained development approval to redevelop the town square outside its Claremont Quarter shopping centre, with about a $4 million upgrade to the laneway and alfresco area.

It is spending about $5 million on upgrading the outdoor dining precinct at its East Victoria Park neighbourhood asset Park Centre.

Hawaiian has also spent $5 million on refurbishing its Forrestfield shopping centre and has partnered with the City of Kalamunda to bring a library inside the centre.

Mr Kilbane said Hawaiian aimed to approach each asset differently, to try to reflect the needs of the communities they were in.

“We don’t take the view to just do a cookie cutter type approach to our centres, we want to make sure that they … reflect who their customers are [and who] want to come to those centres,” he said.

“Some of our competitors … just put a sticker on the door and leave people to turn up, whereas we want to make sure the experience when people are at our centers is positive.

“We’d like to think that people will drive that little bit extra to come to one of our centres, rather than go to the centre that’s little bit closer to them, because they know that it’s a better experience.”

Centuria Capital Group bought Busselton Boulevard Shopping Centre for $16 million earlier this year.

Mr Kilbane said the company was looking to grow its retail portfolio but there were very few suitable properties coming to the market.

“Our view would be we could acquire more if we could get more,” he said.

Hawaiian sold London House on St Georges Terrace for $102 million to Leonie Baldock late last year and purchased Hillarys Shopping Centre for $34.2 million in the same month.

Mr Kilbane said this highlighted the group’s focus on retail.

“At the moment, we are focused on putting time and money into existing assets, we think there is potential to get them to be more true neighbourhood centres.”

Centuria Capital Group’s head of retail Bruce McCully is also keen to build the group’s retail portfolio.

He told Business News that because Centuria’s retail assets were not contained within a retail investment trust, the company did not have to divest these properties when the market dipped.

“All the REITs in their latest announcements have said they’ve been net sellers this year, whereas our business is a bit different,” he said.

“All of our retail sits in unlisted wholesale funds, and they’re either single asset or two-asset funds, they’re not very big … and we wouldn’t sell an asset unless it’s a good time for the investors.

“We wouldn’t sell something at the bottom of the cycle just to clear it out.

“Wholesale funds accept a bit more risk to get a higher return, so we would be seeing ourselves as buyers in this market, definitely.”

And though valuations have reduced for the fund manager’s east coast retail properties, Mr McCully said there had not been the same movement in WA.

Centuria’s $676.6 million ‘daily needs platform’ in WA has seen a 0.05 per cent valuation increase and valuation for its $567.7 million large-format portfolio jumped 0.04 per cent this year.

“WA hasn’t really been impacted from a valuation [perspective], because [yields] never really tightened as much as [in] WA as it did on the east coast, so we didn’t see those drops,” she said.

In the eastern states, retail assets transacted for as low as 4 per cent yield in 2019-20, whereas WA retail yields got to around 6 per cent.

Mr McCully said yield increases across most asset classes have been more pronounced on the east coast than in WA.

He said he was looking to expand the company’s large-format retail portfolio to capitalise on consumer trends and rental growth potential.

He said despite the doom and gloom about people not spending money, housing shortages meant more houses would be built and people would need more furniture and goods from large-format stores.

In addition, a lot of the tenants in large-format retail properties typically take long leases and as they expire there has been significant uplifts.

“I think you’ll see some good results coming out of the large format property owners,” he said.

Centuria is part way through building a $76.3 million large-format retail development at 180 The Promenade in Ellenbrook, and completed another similar centre in Albany late last year.

“We’re still investing heavily in our existing fleet … [and] we are definitely focused on what we can do in WA,” Mr McCully said.

Centuria Capital Group also owns several retail assets in Perth’s CBD, including former Country Road building at 307 Murray Street.

Construction works are under way to prepare the building for luxury retailers Cartier and Fendi to operate out of the store.

Colliers research shows luxury retail is performing strongly across Australia, with the market expected to be worth about $10.4 billion this year, a 12.3 per cent growth on 2022.

A new tenant is also lined up for Centuria’s Forrest Place asset, which City Beach once occupied.

Mr McCully said while Murray Street was experiencing strong demand from tenants, Hay Street was struggling.

Most of Perth property fund manager APIL’s assets under management sit in the retail sector, with Floreat Forum, West Leederville Shopping Centre and Byford Marketplace in its stable of assets.

The company has plans to incorporate a residential component at its Floreat asset, in a similar move to AMP’s redevelopment of Karrinyup Shopping Centre.

Nick Hughes says APIL still intends to add a residential component to its Floreat Forum asset. Photo: David Henry

APIL director Nick Hughes said the proposal was still in the planning stages but the fund manager was still set on progressing the project, given the clear need for housing.

“The housing market’s a fairly substantial topic of discussion, [and] there is a fair bit of migration happening,” he said.

“We need the supply, so if you can make it work and, more importantly, provide a return to investors, then I think it’s something you have to pursue.”

Mr Hughes said inflation had impacted on some areas of retail spending, which trickled down to leasing deals.

However, he said retail still provided strong investor returns.

“If you can find the right deals, it (retail) is still a more defensive asset than some other areas of property,” he said.

APIL was set to purchase Midland Centrepoint last year but pulled out during the due diligence phase.

Mr Hughes said the fund manager was also looking at another retail asset but decided against buying it.

He said he expected some retail transactions to occur soon, which should provide a clearer indication of what the asset class was worth.

Regional activity

The heated construction market has meant progress has stalled on the major shopping centre upgrades planned for Perth’s metropolitan area.

Vicinity Centres and Perron Group’s $350 million expansion of Morley Galleria was initially approved in 2016.

The joint venture partners revised their proposal in 2019 and put the project on hold later that year.

In April, Perron Group released a statement saying the $150 million first stage of the revamp, which comprises the refurbishment of Myer and new indoor and outdoor dining facilities, should start construction later this year.

But there has been no update on the project since that date and no news on whether a builder has been appointed.

Perron Group’s Cockburn Gateway is also expected to undergo $1 billion overhaul, after gaining approval in late 2021.

The company could not provide an update on the status of that project, which consists of a multistage development to transform the suburb’s town centre to be rolled out over two decades.

Scentre Group sought a two-year extension for its $42 million plan to build apartments at its Westfield Whitfords City asset in late 2022.

Business News is not aware of any updates around the project. The asset’s 50 per cent joint venture partner, GIC, is looking to sell its stake.

Colliers brought the sub-regional centre to the market earlier this year, with the expressions of interest period running out on July 26.

There has been no word of a buyer lining up for the asset but Singaporean vendor GIC is expecting about $250 million for it.

The Western Australian Planning Commission approved Scentre Group’s proposal to expand Westfield Booragoon, formerly known as Garden City, earlier this year.

The cost of the project, estimated at $792 million, blew out by $300 million in February, as the proponent announced it would deliver the proposal as one project with consecutive construction stages.

Scentre Group acquired a half stake in the project from AMP Capital in 2019, when the centre was rebranded to Westfield.

The company did not respond to Business News’ requests for comment but industry insiders say an update on the Booragoon project is expected soon.