As Residential Storm Rages, Investors Find Refuge in Supermarkets

As a perfect storm batters the residential property sector, investors are finding refuge in the recession-proof security of supermarket-anchored retail. The $500-million sale of 10 Woolworths assets earlier this year by the billionaire Taiwanese Lin family underscored the strength of the sector. Supermarkets are likely to remain one of Australia’s strongest asset classes, as investors seek shelter from headwinds elsewhere, according to Colliers national director of retail Tim McIntosh. “The most interesting trend at the moment in a sector that’s been very parochial, is that we’re finding a large volume of new investors that are actively seeking the supermarket investment class,” he says. Inflation-linked rental growth A key supermarket drawcard is inflation-linked rental growth. “If the price of an apple goes up, the total sales of that supermarket increase, and if that landlord has a percentage rent mechanism, rent goes up,” McIntosh says. “Therefore inflation can actually be positive in terms of rent growth from a landlord perspective; that’s why supermarkets have such appeal, and it’s also why supermarket investments are first and foremost about value preservation, and then secondly, the rental and capital growth that they provide as a passive, long-term-investment.” Rental terms offer long-term stability too. Coles and Woolworths typically sign 10-year leases with options extending to 70 years—still respectable even though commitments used to run closer to 25 years. ▲ Expressions of interest in this Aldi supermarket at 512–544 Spencer Street, West Melbourne, closed on May 13. “The sophistication supermarkets have in terms of identifying where the right locations are for consumers means they’ve got high conviction in terms of the success they’re likely to have in those locations,” McIntosh says. “And it’s a big investment upfront. Woolworths and Coles supermarkets are 3000sq m-plus, with all the back-of-house infrastructure and fridges—they don’t do it on the basis they’re expecting to vacate in five or 10 years.” Once a supermarket commits to a location, they’re often very sticky as a tenant. “If you zoom out more generally, retail in Australia on a per capita basis relative to other developed nations, we’re actually significantly undersupplied,” McIntosh says. “And in a lot of catchments, the supermarket is performing very well, and arguably, could support a second store nearby.” But construction costs and land supply especially in metropolitan areas are limiting factors. “Existing stores are in higher demand because the supply of new build is limited, but that lack of supply also means that existing stores are likely to trade even stronger in the future.” Beyond the Big Two The appeal extends beyond Coles and Woolworths. Operators such as Harris Farms, IGA, Aldi and Lidl often require smaller floor plates, opening up locations in residential-led developments or metropolitan areas where space is limited. Colliers is currently selling an Aldi at West Melbourne, on a site leased to the German supermarket for 14 years with CPI-linked annual rent growth capped at 8 per cent. At 1595sq m, it is the largest supermarket in the primary trade area. “There are high barriers of competition and the amount of medium and high density residential in the area [makes it attractive],” McIntosh says. ▲ Colliers national director of retail Tim McIntosh. “It’s very difficult, almost impossible, for Woolworths to amalgamate multiple titles to enable them to have a full line supermarket in some of these areas. “And as a consequence, the West Melbourne site is really thriving off the back of those high barriers to competition.” The depth of buyer demand is equally striking. Colliers’ sale of a Woolworths in Doncaster East late last year — fetching $16.53 million on a 3.65 per cent yield, reportedly the tightest for a full-line supermarket since 2022 — drew 22 offers in the first round alone. Developers and investors pivot to retail Both developers and investors are seeing the appeal of retail-focused developments. Earlier this year Charter Hall paid $250 million for three Woolworths-anchored regional shopping centres. During an investor call last week, Frasers Property Australia chief executive Cameron Legatt said that while opportunistic residential was still on the cards for the developer, the group was looking at lower risk asset classes, such as masterplanned communities and retail. “We’ve opened two retail projects in the last four months, and they’ve been very successful,” Legatt said. “That doesn’t mean we won’t build apartments, but you’ve got to be very selective, and you’ve got to do it in the right markets.” ▲ The Woolworths at Doncaster East, 20km from Melbourne CBD, was sold for more than $16 million late last year. CBRE retail capital markets senior national director James Douglas says that the team took an off-market approach to connect Forest Endeavour with the Woolworths assets. “Forest Endeavour was attracted by the strong lease covenant Woolworths offered, as well as the quality of the design and build,” Douglas says. It was also a prime moment for Woolworths, which was recycling capital, and marked an increase in the scale of investors considering supermarkets. “The movement is fluid and all investors from high-net-worth privates to institutions are currently active at present,” Douglas says. While the investor market is currently focused on the cost of debt versus returns, with an eye on the cash rate. “But financing costs have somewhat been met or offset with strong asset income growth experienced across the sector,” Douglas says. And while the opportunities are tight, they are there. CBRE is co-ordinating a national supermarket portfolio of around $100 million in assets across NSW, Queensland and WA, as well as a portfolio of neighbourhood assets in Queensland. Who’s investing in supermarkets? The overarching theme in retail is that investors are seeking lower risk asset classes—and residential is increasingly looking less attractive for the many risk-averse groups. “We’re dealing with a number of groups where they are selling multiple residential properties and recycling that capital to invest in more passive investments, and if they’re not particularly experienced in commercial property, supermarkets are an attractive investment class,” McIntosh says. Supermarkets, neighbourhood centres have been most appealing for high-net-worth private investors, family offices and syndicates, but that’s changing. “Retail as a sector more broadly has really strong tailwinds, it’s often non-discretionary and a lot more resilient. “Historically, investors have had a bias towards office or perhaps industrial and residential, probably having higher conviction in terms of the stable returns that they can get in retail. “But those investors are paying a lot more attention to retail at the moment, and that underlying buyer demand is very strong.”

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