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The investment appeal of neighbourhood shopping centres
To industry players, they’re called convenience retail. For everyone else, they’re better known as neighbourhood shopping centres, and they’re emerging as the next hot commercial investment opportunity.
These property sites are anchored by a large national or international tenant such as a Coles or ALDI that attract other retailers such as chemists, medical centres, hairdressers, newsagents and fast-food outlets.
Located in growth corridors, they are proving to be excellent defensive assets that have historically been less volatile than other retail sectors because of the predominantly non-discretionary nature of their underlying tenant cashflows.
They reflect a shift in shopping routines towards an increased emphasis on quick access to everyday essentials and, consequently, are largely immune to e-commerce. This shopping behaviour also encourages discretionary spending.
These retailers also have lower operating costs as they don’t have the maintenance and refurbishment requirements of larger retail operations. This allows for higher profit margins and lower rents, which, in turn, gives landlords greater leverage when leasing a site. It also means if a site becomes vacant, it’s usually filled quickly.
But the key to convenience retail is the anchor client, typically a major supermarket chain. When these organisations, which invest heavily in understanding retail thematics and have a strong aversion to cannibalising their own catchment areas, opt for a location and lock in a long lease, it sends a strong signal to other retailers that the centre will attract traffic.
When coupled with restrictive local council planning overlays, it makes for a scarce real estate asset where the market is rarely oversupplied.
These are the fundamentals that prompted specialist property fund manager Trilogy Funds to take its first foray into the large-format retail and convenience retail asset classes with the recent purchase of a $220 million portfolio of property income funds.
The strategic acquisition, which bolstered funds under management to more than $1.5 billion across its unlisted property, real estate credit and diversified income funds, gave Trilogy Funds the management rights in four and co-investment stakes in three property trusts that include shopping centres in Werribee in Melbourne’s west, Elara in Sydney’s north-west and Caboolture just north of Brisbane.
Laurence Parisi, Trilogy Funds manager, property funds, said: “The convenience shopping sector continues to enjoy strong tailwinds, with a combination of factors such as rapid population growth, a shift to convenient, quick-access shopping and healthy rental growth across the asset class.
“These assets have been constructed under a develop-to-own model in high-density and strategic locations with the aim to provide both capital upside to investors undertaking this development while securing tenants with strong covenants within a centre anchored by a major retailer such as Coles.”
Trilogy Funds also sees potential for further tenant-led developments in the large-format retail and convenience sectors.
“Part of Trilogy’s success lies in the ability to identify high-quality assets offering favourable yields, as well as assets that offer tenant-led expansion prospects,” he tells The Golden Times.
“In these sub-sectors we typically see anchor tenants lead the expansion process, undertaking research and identifying locations that are attractive for future development.”
Trilogy Funds is optimistic about equity opportunities in industrial, convenience retail and large-format retail asset classes over the next year with several compelling acquisition opportunities under review.
“There continues to be underlying demand from our investor base for commercial property opportunities across the industrial and retail sectors, with a particular focus on assets with strong tenant-led development opportunities,” he says.
“Trilogy is focused on identifying assets being offered at attractive capitalisation rates, both on-market and via our relationship network, creating a window of opportunity to expand the portfolio.”
