The retail sector has been in a state of limbo for a prolonged period. The threat of online shopping, the pandemic, and increases in vacancies hindering returns, all aided in putting retail on the backburner for many buyers. After a quiet 2023, with many vendors unable to accept the new levels of yield (after the lows achieved during the pandemic thanks to cheap finance and increased buyer pool), 2024 has commenced with a flurry of sales at refreshed yield levels which may signal a revitalisation of activity for the asset class.
Stockland Nowra was one of the latest sales with a reported yield at around 8 per cent. This is far from the 6.5 per cent capitalisation rate attributed to their FY23 valuations which was even lower in prior years. With a sale price expected to be more than $10 million less than the current book value, is now the time for many private investors to take advantage of sellers' revised expectations?
Online retail trading has been considered one of the major reasons for the change in sentiment surrounding retail property, despite returns already showing declines prior to its growth in popularity. Online retailing saw significant increased traction during 2017-2019 causing many retail asset owners concern, with retailers contracting space requirements and rethinking their bricks and mortar strategy. 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. With the exception of stimulus such as “Click Frenzy” events including “Black Friday” and “Cyber Monday” causing online rates to surge (notably November), the overall level of online trade has stabilised, providing greater confidence around how retail, in particular centres, can reposition and move forward.
As the retail sector continues in this state of restructure, the rise in finance costs has considerably impacted the demand to purchase and what the acceptable yield level is 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. 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.
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. 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.
