Which Australian retail subsectors will outperform the market this year?

JLL provides a lowdown on different subsectors’ expected performances in 2022.

Neighbourhood centres have the best potential to outperform in 2022 according to JLL, despite capital values moving approximately 20% higher in 2021. Pricing metrics (yield and return expectations) remain conservative relative to prime assets in the office or industrial market. 

“There are a range of institutional and private capital sources converging on the neighbourhood sector, with limited availability of high-quality centres, particularly in metropolitan locations. There continues to be a disconnect between book values and achievable yields to acquire assets given vendors have become more reluctant to sell,” JLL adds. 

Furthermore, a range of investors are still seeking defensive investment opportunities for capital preservation in an environment vulnerable to external shocks. 

Here’s more from JLL:

Large format retail is the other sub-sector that performed exceptionally well in 2020 and 2021 in terms of yield compression and capital value growth. Yields compressed by 105 bps since the end of 2019 (to 4Q21), with some recent transactions reflecting yields below 5% for the first time on record. 

Capital values appreciated by approximately 29% (based on a sample of listed book values) over the same 2-year period to December 2021, with 24% growth in 12 months to December 2021. The yield spread between large format retail and industrial assets has widened, and for some investors, large format retail assets are considered a substitute for industrial properties, partly because of the similar location and physical characteristics. 

Monthly spending on household goods (furniture, electronics and hardware) remains consistently very high, and was around 22% above the pre-COVID-19 level in December 2021. Unlike neighbourhood retail, we see less scope for strong capital value growth again in 2022 given yields have moved to record low levels and the traditional parts of the tenant mix are ultimately still discretionary based. 

The housing market, which is a key driver of this sub-sector, is likely to become less supportive of spending on household goods in 2022. It is unlikely that spending on household goods can be sustained at the current exceptionally high levels, given the pull-forward of purchases from future years. 

Sub-regional shopping centres attracted more investment in 2021 and reached close to record levels (AUD 2.8 billion) and 4 times higher than in 2020. A range of sub-regional assets traded in 2021 and pricing was more competitive for smaller, convenience-based sub-regional centres with a higher proportion of non-discretionary retail. The improvement in discount department store sales has contributed to the revival of interest in the sub-sector from years prior to the pandemic. 

We expect the divergence between small and large subregional centres to remain prevalent again in 2022, with smaller convenience-based sub-regional centres likely to continue to outperform while larger sub-regional centres are generally still exposed to underperforming fashion retailers. 

Regional shopping centre transactions were recorded in late2021 for the first time since 2019. Although liquidity improved for assets over AUD 250 million (such as regional and large sub-regional centres) it is unlikely that there will be the depth of demand to drive pricing tension and yield compression for assets of this scale.

While occupancy has been more resilient than generally expected and rents have largely corrected, there are still some pressures on the leasing market which will temper investor enthusiasm for mature, large, discretionary-based assets that don’t have a compelling value-add element. Those assets with optionality value are likely to be pursued.