National buyer demand strengthens the Large Format Retail market

Ongoing population growth and city sprawl continue to drive national interest for Large Format Retail assets due to their expansive land holdings and strategic positions.

Investors are increasingly drawn to the sector as it provides a higher investment return when compared to industrial, neighbourhood shopping centres and supermarkets. Over the last decade, the average yield for Large Format Retail relative to other sectors sits at 7.46% compared to 5.84% for the Industrial sector, 6.14% for neighbourhood shopping centres and 5.58% for supermarkets.

Over the same timeframe however, Large Format Retail gross rents have only seen a 13% growth (1.3 %pa), while industrial prime rents have increased by 85% (8.5 %pa). This has seen the cost advantage for retailers to store their goods off-site significantly decrease.

Investors have recently observed attractive rental growth, increased retailer demand and a growing need for larger spaces. Buoyed by strong sales, retailers are choosing bigger stores with a larger back-of-house to better support omnichannel operations. In 2014 rents were 2.7 times higher than prime industrial rates. Today, they are only 1.7 times higher when accounting for logistics costs associated with off-site storage.

Colliers’ Director, Tim McIntosh, said, “The gap between Large Format Retail rents to industrial rents has changed materially over the last decade. Retailers have recognised it is more cost-effective to have larger retail stores where they can optimise their omnichannel sales across in-store, click and collect and last-mile delivery as transport costs and industrial rents limit the value arbitrage of storing off-site,”

“Some investors have recognised retailers are leading the growth in the sector, with strong sales over the last four years seeing tenants opt for larger store footprints and a willingness to pay higher rents after a stagnant decade of limited rental growth, while yields remain highly attractive relative to other investment sectors,” Mr McIntosh continued.

With a return to growth for the Household Goods sector of over 25% since the pandemic, the successful off-market sale of HomeCo Parafield, South Australia, to funds manager and property developer Accord, reflects this curve.

The sale of HomeCo Parafield was secured by Colliers’ agents Tim McIntosh and Jordan Schmidt for $28.5 million, achieving a premium to book value. Anchored by Officeworks, the centre is 100% leased to national tenants across 15,571 sqm with a 3.7-year WALE. It occupies a metro-Adelaide location 15km north of the CBD on a 37,122 sqm site adjoining Parafield Airport.

“The acquisition of the HomeCo Parafield Centre illustrates well our opportunistic approach to identifying value for our investors. The centre provides an attractive mix of income and value growth potential based on strong underlying fundamentals, while also benefitting from compelling tailwinds we observe in the Large Format Retail sector,” Lachy Hogarth, Managing Director at Accord, said.

According to McIntosh, “We identified Accord as the off-market purchaser of HomeCo Parafield following its strong interest in recent Victorian LFR assets that were marketed publicly, such as Chirnside Lifestyle Centre, which sold for $50.4 million to IOOF.”

Another recent example of new buyers entering the sector is Blackfox Property’s recent acquisition of Shepparton Retail Hub in Victoria for $11.61 million. The Officeworks-anchored Large Format Retail centre was sold by Colliers’ Tim McIntosh and James Lawson and Stonebridge following an on-market campaign late last year.

“These recent transactions highlight the strong trading assets, the strength of the Large Format Retail sector and the depth of demand from investors,” Mr McIntosh concluded.