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10 malls in 18 months: fund manager RAM builds Amazon-proof portfolio

This article originally appeared in Australian Financial Review

While the emergence of Amazon and the growth of online retailing will continue to disrupt bricks and mortar retail, Scott Kelly, chief executive of boutique fund manager Real Asset Management, believes sub-sectors like convenience malls will thrive.

“You either want to play at the top end of the market – the super regional malls – or those at the other end, the supermarket-anchored neighbourhood malls, which will always have a place near the top of the retail property hierarchy,” he told The Australian Financial Review.

“Where you don’t want to be is in the middle – the regional malls exposed to sectors like apparel.”

Mr Kelly, an ex-UBS investment banker and CEO of RAM, has put this philosophy into practice snapping up 10 supermarket-anchored neighbourhood malls in the past 18 months on behalf of high net worth investors.

“The buzzword in the last 24 months in retail property is ‘non-discretionary’. For us its all about convenience,” said Will Gray, a former LaSalle fund manager, who is RAM’s managing director and head of property.

“We’re interested in dominant neighbourhood and convenience centres, where there is a high degree of non-discretionary retail and services like medical and childcare. We like assets that attract frequent wallet spend rather than weekly basket spend.”

RAM’s $280 million portfolio includes the Broadway Plaza in Punchbowl in south-western Sydney acquired for $41.2 million on a yield of 7.6 per cent, the Mowbray Market Place in Tasmania bought for $38.6 million on a 7.4 per cent yield in October and “supercharged convenience mall” Ballina Central on the NSW north coast, acquired for $46.3 million on a 7.2 per cent yield.

All are anchored by a dominant supermarket – a Coles, Woolworths, IGA or even an a smaller independent chain – alongside a mix of national and non-discretionary speciality tenants less exposed to the Amazon-led disruption.

With an initial acquisition yield of 7.45 per cent, the portfolio offers a significant premium to both bonds, interest rates and the cap rates on the larger listed portfolios, like the Woolworths-anchored SCA Property Group, which stood at 6.5 per cent, according to its latest results.

Conservative approach

This month RAM will add the Coles-anchored Springfield Fair neighbourhood mall in Brisbane to its portfolio, acquired from ASX-listed Charter Hall Retail REIT for $23.5 million on a yield of 7.1 per cent.

It’s in exclusive due diligence on another Brisbane investment for just over $10 million with Mr Kelly and Mr Gray aiming to have $380 million of assets management and about 15 malls.

“Our ultra high net worth investors want 40 per cent of their investment in physical property. We’ve taken that approach and embraced it,” Mr Kelly said.

“We’ve taken a conservative approach based on where we are in the current cycle. I would not say we are property bears, but believe its necessary to play it safe,” he added.

This conservative approach has focused specifically on assets below $50 million – which the bigger institutions like Charter Hall are divesting – and which they can buy on yields around 7 per cent or higher and add value through new leasing deals, upgrades and fresh development.

This high-yield approach has precluded assets in the major metro markets where “you can’t find anything under 6.5 per cent”. But they have been able to find plenty of off-market opportunities in suburban and regional locations, underpinned by “strong demographics” and that dominate their catchment.