In a world where investors are increasingly seeking differentiated sources of return, direct investments in Australian retail property – particularly shopping centres – is emerging as a standout opportunity. While this sector was once out of favour amid concerns surrounding consumer spending habits and higher interest rates, the dynamics have shifted. Today, patient private capital is stepping in where institutional buyers have been largely absent, taking advantage of special situations and attractive entry points.
The appeal lies in supply and demand fundamentals. Limited mall space, high construction costs, and a lack of new developments have created significant barriers to entry. Meanwhile, population growth and steady consumer demand support tenant revenues, particularly where centres are anchored by daily needs and large-format retailers. On the supply side, institutional owners have been motivated to sell – driven by portfolio rebalancing or reallocation needs – at a time when offshore institutional interest has been subdued. This has created the opportunity for patient private capital to secure assets below recent book values and often significant discounts to replacement value.
Over the past two years, we have been selectively gaining exposure to this segment for our clients. We’ve partnered with experienced managers such as IP Generation, Barrenjoey and Assembly Funds Management, who are active in sourcing and managing the more appealing assets transacted in recent times. Across the portfolio of trusts we’ve invested in, income yields have ranged from 8% to 11% p.a. (often largely tax-deferred), with net asset value uplifts to date of 12% to 35%. Total per annum net return expectations sit in the mid to high teens, anchored by strong underlying cashflows rather than excessive leverage or ambitious exit assumptions.
Importantly, these managers take an active approach to enhancing the value of the assets through tenant rental reviews and beneficial repositioning, or by unlocking upside from surplus land and pad-site opportunities. We are highly selective in the opportunities we pursue, passing on those where pricing, tenant mix, location, capex requirements or return expectations don’t represent strong value for our clients. We also place significant weight on the manager’s track record and ability to deliver timely and successful exits.
Liquidity is a key consideration – these investments are typically modelled on a five-year investment period with limited (or nil) liquidity during the term – so partnering with the right manager is critical. To offset the lack of liquidity, our clients appreciate the diversification these assets bring to a portfolio with reduced exposure to listed market volatility, as well as providing attractive overall returns with ongoing income streams and compelling capital upside potential. In the current environment, with cash rates trending down, the 8%+ per annum income yields are particularly appealing.
Australian investors have a natural affinity with bricks and mortar. For those willing to take a long-term view and partner with experienced managers, retail property provides a differentiated risk-adjusted return opportunity. As wealth managers, our role is to look beyond traditional listed markets and bring these differentiated, high-quality opportunities to our clients.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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