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While 2023 poses a new slew of headwinds for the commercial investing landscape, including repricing, inflation, and interest rate uncertainty, one sector is expected to stand on stable terrain.
JLL’s mid-year Retail Investment Outlook Report predicts the retail sector will perform well across 2023, with last year’s momentum and new capital sources expected to continue fuelling the market.
The report points to the sector’s resilient fundamentals as evidenced by robust retail turnover growth during and after the pandemic. In December 2022, retail spending exceeded pre-pandemic levels by 26 per cent, consistently surpassing market expectations throughout 2022.
Further emphasising the sector’s resilience, the report highlighted retail investment volumes exceeded expectations “[despite] significant challenges in the macroeconomic environment and uncertainty around peak debt costs dominating headlines throughout the second half of 2022”.
“During the year, investment volumes totalled $6.6 billion, 17 per cent less than the 10-year average but only less the 10-year average if the record-breaking transactions was to be excluded as an anomaly year,” the report read.
JLL’s head of Retail Investments in Australia, Sam Hatcher, acknowledged the emergence of a mismatch between vendor and buyer expectations in 2022. The report noted this has resulted in assets being traded at an average 9 per cent discount to initial vendor pricing expectations and ultimately led to an overhang of $6.6 billion in retail assets.
But from a repricing perspective, JLL also predicts retail to be the most resilient asset class, benefiting from the income and value reset it experienced in 2020 compared to other sectors that maintained higher asset valuations during the period.
“The retail sector continues to be increasingly attractive in terms of valuation and pricing compared to other property sectors, attracting significant new capital into the sector in 2022,” noted Mr Hatcher.
However, the report highlighted asset repricing remains a significant theme in 2023, particularly as the yield decompression cycle continues across sectors.
“More evidence of retail yield decompression is likely to emerge in 2023 but not to the same extent as some other real estate sectors given retail yields were at a higher starting point relative to the risk-free rate, and the lack of significant compression over recent years in most retail sub-sectors,” the report read.
Another key prediction from the report is the shift in capital sources for the retail sector.
While private investors are currently active as both buyers and sellers, the report noted A-REITs (Australian real estate investment trusts) are expected to face funding challenges and are likely to remain inactive in terms of acquisitions throughout the year.
Notably, the report expects to see strong engagement from offshore investors as they “continue to build a strong case for investment in Australia given the value proposition relative to market fundamentals”.
“Offshore groups, which have refocused on convenience retail and sub-regional centres in recent years, will potentially start to target regional centres given the correction in values to-date, recovery in trading performance and leasing, and depth of alternate use opportunities which are likely to emerge,” the report stated.
Despite the positive outlook for the sector, JLL acknowledged investment returns and profitability in the retail sector can face significant challenges due to high inflationary pressures, which can reduce discretionary spending and result in higher operating and labor costs.
“Increasing cost pressures for business will continue to weigh on retailer profitability in the near term and will consequently slow leasing demand and dampen rental increases,” JLL’s head of retail, property and asset management for Australia, Tony Doherty, stated.
He also noted a shift back to bricks and mortar, with online shopping seeing reduced spending, stating “[we] expect e-commerce rates to stabilise over the short to medium term, serving as a potential tailwind for brick-and-mortar stores and retail vacancy.”
JLL’s head of capital markets research for Australia, Andrew Quillfeldt, also noted inflation will also have an impact on investor decisions.
“While rising debt costs are a concern for highly leveraged investors, for the majority of institutional real estate owners in Australia, debt management has remained relatively conservative in terms of gearing and interest cover ratios post the GFC.
“However, some fund managers may choose to selectively divest assets to maintain a conservative position ahead of potential further devaluations in 2023,” he stated.
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