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Investors are turning their sights to large format retail (LFR) centres, a new report has shown, lured in by strong growth prospects in the sector.
The latest LFR report from CBRE revealed that institutional buyers played a dominant role in Australia’s LFR acquisitions, representing 55 per cent of the total in 2022. This marks a significant increase from the 29 per cent share recorded in 2021.
A further look into the data showed transactions are still dominated by domestic buyers, with 2022 transactions comprising 83 per cent domestic and 17 per cent foreign buyers.
But this surge in demand is not expected to dissipate anytime soon. Research analyst Darcy Badgery forecasts a sustained level of interest from buyers, driven by factors including increased housing demand, projected growth in rental rates, and a restricted supply pipeline.
“Australia has one of the second highest projected population growth rates in the developed world at 15.3 per cent between 2023 to 2033, which is likely to drive significant demand for housing and an associated tailwind for LFR sales figures,” he explained.
The figures work out to around 4.43 million people, with the report estimating a $45 billion additional retail spend from migration-related demand over the period, or $4.1 billion annually.
Strong levels of population growth could also lead to a chronic LFR shortage, with the expert estimating “[with] just 711,845 square metres of space currently in the development pipeline between now and 2026 — equivalent to just 0.41 square metre per additional person”.
Currently, there are 319 LFR centres across the country, with a total market size of approximately 5.34 million square metres of floor space.
Mr Badgery pointed out that shortages in LFR’s city supply may also be exacerbated due to the cannibalisation of LFR by the industrial sector in infill suburbs, particularly on the Eastern Seaboard.
“Particularly in Sydney, where the industrial vacancy rate has hit a record low of 0.2 per cent, it may be more feasible for some developers to rework proposed or existing LFR centres for industrial purposes, which will further impact the supply outlook.”
Consumer habits are also likely to drive demand for LFR stores, according to CBRE.
CBRE’s global poll which surveyed 20,000 participants worldwide, including 1,006 respondents from Australia, has revealed that a significant 80 per cent of consumers prefer the experience of shopping in physical stores when it comes to DIY products.
Moreover, the poll further highlights the significance of in-store shopping for homewares, as 71 per cent of respondents expressed a preference for visiting physical stores when purchasing white goods, electrical appliances, and furniture.
Notably, the report showed sales remained strong amid cost-of-living concerns and inflation.
“The demand for household goods, a major occupier in LFR assets, is validated by the 10-year average annual growth of 4.6 per cent or $2.9 billion per annum (from 2013 to 2023),” said the report.
Occupier sales growth has also been strong, with the report noting an annual sales growth of 6.7 per cent from before to after COVID-19 (for the five major listed LFR retailers).
Adding to the sector’s optimistic outlook, the report cited the Reserve Bank of Australia’s (RBA) positive wage growth forecasts.
According to the central bank, wage growth is expected to experience a significant year-on-year increase of 4.2 per cent in 2023, marking the highest growth rate since 2009, before stabilising at 3.8 per cent by mid-2025.
“LFR sales have historically correlated with wage and population growth and result in increases in discretionary spending for household goods,” the report read.
James Douglas, CBRE’s senior director for retail capital markets, noted, “LFR assets are traditionally tightly held and rarely traded, as investors are attracted to strategic landholdings, which may offer a higher future use, transparent and reliable cash flows and higher than average expense recoveries.”
While rents for LFR assets are forecast to grow at mid-single rates through the year, CBRE’s report forecasts that Sydney and Melbourne will maintain the highest growth rates of 5.1 per cent and 3.9 per cent, respectively, during the period, supported by these cities having the highest expected migration intake and associated population growth.
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