A “perfect storm” of powerful investment factors has forged Australia’s large format retail (LFR) sector into a strategic ‘must-own’ asset class, according to new analysis from JLL.
The commercial real estate services and investment management company identifies the sector’s dramatic re-rating as a result of highly favourable dynamics that are almost impossible for competitors to breach.
The first factor working in the sector’s favour is said to be a fundamental de-risking of its income. The tenant profile of LFR has evolved to include a significant base of non-discretionary retailers like chemists, supermarkets, health services, and gyms. This, says JLL, provides owners with a “rock-solid, recession-proof income stream, shielded from the volatility of discretionary spending”.
Secondly, this guaranteed demand is now running up against a wall of scarcity. National vacancy rates have plummeted to a record low of 2.3% and is virtually non-existent in Melbourne, where rates are 1.1%, providing extremely limited opportunities for new competitors to move in. This reality has handed existing landlords immense pricing power, says JLL, fuelling strong rental growth of 5.6% in the last year alone.
Thirdly, scarcity is said to be cemented by the third and “most powerful” factor, a “formidable barrier” to entry created by soaring construction costs. JLL analysis shows the economic rent required to justify a new development is now 92% to 105% above current market rents, making it financially unviable to build new, competing centres.
Nick Willis, Executive Director of Retail Investments for Australia & New Zealand at JLL, says investors are attracted to the incredible evolution of the asset itself.
“These centres have transformed from simple bulky goods destinations into highly successful, diversified hubs for daily needs, health, and services. This tenant diversification drives consistent foot traffic and underpins exceptional income security,” he says.
“With record-low vacancy and a constrained supply pipeline, the runway for rental growth is significant, and astute investors are moving decisively to capture that upside.”
