How to invest in retail – and avoid the challenges of a consumer downturn

There’s been much talk about woes in the Australian retail sector. In a tougher economy, discretionary spend is the first to get cut – and companies like Baby Bunting and Harvey Norman typified this (despite the odd company that has come out unscathed - so far). Even Woolies and Coles bemoaned the challenges of inflation on consumers, with theft up and both chains investigating options to tighten controls.

It’s clear that inflation and the rate hiking cycle have created some headwinds, but that doesn’t mean the sector is necessarily one to steer clear of. One answer might be investing in retail centres themselves.

Linda Rudd and Mark Vonic of Realside Property see significant opportunity on this front, with an institutional need for liquidity opening up high-quality, sub-regional retail assets at discounted pricing.

Think 10,000-30,000 square metre retail facilities with a supermarket and a large discount department store. It can be metropolitan or regional – the term sub-regional simply refers to size.

“The reason that we're quite interested in this sector at the moment is that they often sit on quite under-utilised parcels of land, very large parcels of land that serve as car parking. 

We see them as real genuine infill opportunities and a sector that creates a lot of optionality and interest from our perspective.

Finally, it’s actually repriced to a point where it is most attractive from a yield perspective,” says Vonic.

It’s retail exposure in a different way – after all, investors in this form of property can benefit from rental yield, with quality assets demanding higher yields. It’s not necessarily just dependent on retail brands either, with the option to lease to healthcare companies, gyms and even childcare providers.

In this episode of The Pitch, Rudd and Vonic discuss the opportunity in this space, along with Realside Property’s newest acquisition – Maddington Central Shopping Centre.

This interview was filmed on Tuesday, 2 April 2024.

Edited transcript:

Can you explain what sub-regional retail assets are and why there's an opportunity here?

Vonic: The term sub-regional refers to size, so it doesn't mean a non-metropolitan area, but it's typically a 10 to 30,000 square metre retail facility. It is usually anchored by a supermarket or two, a discount department store like Kmart or a Big W.

The reason that we're quite interested in this sector at the moment is that they often sit on quite under-utilised parcels of land, very large parcels of land that serve as car parking. We see them as real genuine infill opportunities and a sector that creates a lot of optionality and interest from our perspective. Finally, it’s actually repriced to a point where it is most attractive from a yield perspective.

Institutional capital is looking for liquidity, and that's created an opportunity that is repriced. That makes it very attractive to groups like us.

How do you approach selecting an asset in this opportunity?

Rudd: As Mark mentioned, we've had a strategy to look for sub-regional retail centres for the last two years. Any site that is land rich and can provide an opportunity to deliver upside, whether that's through meeting the needs of the local demographic and providing housing, medical, an extra supermarket, any other retail that we feel fits the requirement of that area.

We also look at centres that are already high-performing that we can then add some value to. So that's through tenant remixing, repositioning, again, introducing new retailers, anything that again is suitable for that area and that asset.

You’ve recently acquired a 100% freehold interest in the Maddington Central Shopping Centre. Why this particular asset? What did you like about it?

Vonic: The centre performs very, very well. It's anchored by Coles, Woolworths, and Kmart, all overtrading with about $138 million in aggregate turnover. The centre in and of itself has about $200 million in turnover. We see that as a highly performing centre.

One of the reasons for that is its population catchment is twice the benchmark average. There are 200,000 people that live in this catchment. That creates a very large underlying demand from customers.

The other reason we like this asset is the under-utilised land component. It's a 30,000 square metre centre sitting on 130,000 square metres of land. And what's really interesting about the centre is not so much what's there but what isn't there. It doesn't have medical uses, it doesn't have a childcare centre, it doesn't have any pad sites with any of those food-related uses. And then the other final point, which again peaked our attention when we started looking at this opportunity over 12 months ago, was that it's 600 metres away from a train station. Perth suffers from the same housing issues that every other capital city has - limited supply, increasing rents. And so there's a real urban infill regeneration story around this asset that we're really excited about. It's very rare for us to find a well-performing centre with so much optionality.

What returns are you targeting with this asset and how are you looking at transforming the centre to achieve this?

Rudd: We're buying this asset at a cyclically high yield, fully linked at 8.8%. Across our five year investment hold, we're going to be delivering 8.5% cash distribution to investors. We're targeting a 15.5% IRR, and that's before the transformation. That's really the base case.

We've got a strategy to access and, as Mark mentioned, capitalise on that surplus land. We’re looking to add medical, looking to add another supermarket, looking to add some pad sites, and then looking to unlock again that surplus land, whether it's residential or other uses. That's really how we're going to transform the centre and drive that upside return.

How can investors gain exposure to this asset?

Rudd: We work across an investor base that includes high-net-worth individuals, family offices, and wealth advisors. If investors are interested in getting access to this opportunity, that by all means, they can reach out to us and our team to talk them through the opportunity in more detail. It's worth noting that we work with sophisticated investors. We're a wholesale listed property funds manager, and as long as investors pass the sophisticated investor test, we can talk to them.