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Investors ‘looked up the food chain’ but now eyeing smaller retail

This article originally appeared in Australian Financial Review

The mystery group propping up a new $300 million fund targeting investment in Australian neighbourhood shopping centres has been revealed as Singapore’s sovereign wealth fund GIC, as the smaller end of the retail sector wins increasing interest from institutional investors in the wake of COVID-19.

A number of market sources said GIC was behind the “daily needs” fund recently launched by one of Perth’s biggest landlords, ASX-listed property fund manager Primewest. Primewest would not comment on its capital partner.

GIC has been very active in Australia having made significant investments in the office and industrial market. Its decision to invest in neighbourhood shopping centres follows its attempts earlier this year to offload its stake in one of Australia’s best-known shopping destinations: the Myer Melbourne store in the heart of the Bourke Street mall.

The pandemic has shone a light on the resilience of non-discretionary shopping centres as an asset class while at the other end of the spectrum, larger shopping centres, as well as offices, have come under pressure.

A recent note by Macquarie analysts shows footfall in neighbourhood and sub-regional assets had not deteriorated as much as more destinational assets, particularly CBD malls that had been impacted by tourism and the shutdown of many offices.

Will Gray, head of real estate for boutique fund manager Real Asset Management (RAM), whose investor base is high net worth investors and family offices across the Asia Pacific and has long focused on convenience-based assets, said he was witnessing a new trend of capital redeployment gravitating back towards, specifically supermarket-anchored, retail.

“You see a lot of groups out of Hong Kong that started to buy [Australian real estate] at the end of last year and the start of this year, and they were focusing on office to a certain extent but that is starting to swing into retail.”

“It’s almost as if supermarket-anchored retail has carved its own niche and it’s because in an ultimate societal shutdown as evidenced by COVID-19, our local neighbourhood assets were our community quiltwork type assets when all locals were forced to go home and shop locally,” Mr Gray said.

He said offshore private investors and family offices were leading the way by investing in the asset class but he expected overseas institutional investors to soon follow.

“They will come in time as products develop. Not many local managers have had a great degree of confidence setting up a $300 million fund like Primewest, but that would show others there are opportunities to do so and open up the capital partner model where local managers team up with an offshore investment house and deliver essential service retail products,” Mr Gray said.

Mr Gray said he expected a shift in other institutional investors looking to redeploy capital into the convenience-based retail sector but it would take some time.

“A lot of them have redemption requests that need to be satisfied first. Once liquidity is back in the sector it will be irresistible for them not to consider this sector.”

“I just can’t see large retail remaining high on the appetite and in more recent times even office seems to be not as aggressively chased for product,” he added.

Savills’ national director of retail investments Steven Lerche said the pandemic had shown investors what a defensive asset non-discretionary shopping centres were while other assets were struggling.

“People were always looking up the food chain and trying to get bigger centres but it’s the smaller centres particularly in metro areas that remain a very strong part of the market and as long as there’s some growth in the leases there’s an opportunity to purchase these well and improve your income.”

“Covid has taught people maybe you don’t go to your Westfield anymore but instead you go and do your grocery shopping at your local store. Big shopping centres will always have a place, for sure, but perhaps that place has got to change with the times.”