The lift in retail spending is bolstering purchaser support for large format retail sector investment, according to a recently released research report by Colliers and brokers active in the sector.
Ian Little, Associate Director of Research at Colliers says: “Consumers were out spending across many retail sectors over the past year, but it was the large format stores - DIY/hardware stores, recreational goods outlets, electrical and electronic goods retailers and supermarkets - that garnered significant support from consumers.
“National retail spending in the large format retail property categories totalled $22.6 billion over the six months to March 2021, up 7.1% on the figure recorded for the same period last year. This compares with total retail spending that was by 5.3% over the same period.
“With overseas holiday plans suspended and more time spent at home during lockdowns, this resulted in a significant lift in spending on new furniture, homewares and hardware.
“Consumer confidence has been bolstered by better economic prospects, job security, low interest rates and the wealth effect resulting from house values reaching new record highs. This confidence has seen consumers continuing to spend more within large format stores.”
Colliers Capital Markets Director, Blair Peterken, says: “The number of buyers scouting for large format retail properties across New Zealand continues to be amongst the highest on record, leading to intense competition and strong bidding, especially for prime quality stock.
“In February 2018, we sold Bunnings in Hamilton South for $25.1 million and then again in November 2020 for $36.25 million. The yield firmed from 5.38% to around 4.00% in only two and a half years illustrating how quickly the market has tightened in this sector.
“It is quite apparent that the popularity and success of the large format sector as a sub-sector of retail has really grown and is not just limited to main centres. The regions have also seen significant yield compression in the past 18 months.
“We’ve been recently involved in selling Bunnings New Lynn for $55.75 million at a yield of 3.92%, as well as Bunnings Queenstown, Countdown Mosgiel and Countdown Stratford for market-leading prices and yields,” says Peterken.
Other notable transactions in the past 18 months that Peterken and the Colliers team have been involved in include the sales of Mitre10 New Lynn, Countdown Grey Lynn, and Amberley’s Brackenfield Shopping Centre.
“The growth in the sector is undeniable and the prosperity and confidence in the fundamentals indicate the momentum is set to continue,” says Peterken
“Vacancy rates lifted across the retail sector over the course of 2020 with the exception of the large format retail sector which experienced little change, remaining near their extremely low levels.
“By way of example, vacancy within Auckland’s large format sector ended 2020 at just 1% compared with 3% within shopping centres and a strip retail vacancy rate of 8.5%.
“Large format vacancy rates have moved within a tight band over an extended period, reflecting high levels of demand from occupiers with a new wave of international retailers looking to enter the local market. The increase in demand from Australian retailers is extremely promising for this sector.”
Peterken notes that the strong fundamentals underpin investment demand and returns.
“While low interest rates are assisting purchasers reach new pricing heights, the importance of risk mitigation amongst investors has been amplified by the disruption and uncertainty following the COVID-19 pandemic.
“Investors are targeting the large format retail sector as it offers sound investment fundamentals including high levels of consumer spend, strong occupier demand, low vacancy, limited additional supply and are usually well located with favourable zoning.
“The properties are typically easy to manage, have low CAPEX requirements, and in most cases are essentially a warehouse with higher specification fit-outs.
“The rising appeal from the safety and security of the sector has also meant that competition for large format retail assets over recent months has resulted in additional yield compression, and in turn, an increase in capital values and total returns,” says Peterken.
The latest figures released by MSCI show the large format retail sector generated total returns of 22.4% over the year to March 2021. This sharp increase in returns compares favourably with both the industrial and office sectors.
“We are continually monitoring what the banks are doing with rates because it will affect future pricing, but under current conditions, it is likely that the positive economic and financial fundamentals witnessed in the large format retail sector will continue and lead to further property value gains over the remainder of 2021,” says Peterken.