Real estate and hospitality
Why historically high yield spreads signal now may be the time to buy retail
Richard Germain Headshot
Richard Germain
Managing Director
Shopping centre with a Woolworths
Published 11 August 2021
Share article

The spread between yields for sub-regional retail shopping centres and the 10-year bond yield is at or close to multi-decade highs. The spread has not been near the current levels since the late 1990s.

With the yield spread at such levels, it is our view that now is an opportunistic time to capitalise on select strongly trading retail assets with sustainable rentals.

Yield spreads (2010-2021)

Graph showing yield spreads

Source: Colliers International, Reserve Bank of Australia

Yields a signal of dislocation, not true value

We believe current yields reflect dislocation in pricing, versus being a signal of the true value and quality that exists in the sector.

The high yields in retail to some extent reflect (understandable) concerns about the sector including:

  • the impacts of COVID-19 and consequent lockdowns and closures of many retail stores for periods of time
  • concerns surrounding online retail penetration as a result of increased demand for online shopping
  • reduction in rentals to affordable and sustainable levels for retailers in the current trading environment.

The reality is that many retail assets have recovered strongly and continue to trade well with low occupancy costs and solid prospects for future rental growth.

Price dislocation has also likely been exacerbated by the inability of some institutional investors to buy in the current market. This may be due to various factors including share prices trading at discounts to net asset values, a build-up of fund redemption requests, and foreign buyers largely being ruled out due to current international travel restrictions.


Investor sentiment and demand is on the up

Recent market evidence has indicated that investment sentiment for retail property is already starting to turn, and as such current price dislocation, and therefore investment opportunity, may not be prolonged.

Recent on-market campaigns for sub-regional assets have seen strong demand and firming yields. Casey Central, a strongly performing sub-regional asset in Melbourne, is a good example transacting last month on a capitalisation rate in the range of 5.25% to 5.5%.

Elevated demand for retail assets has been observed in the first half of calendar year 2021 with c.$3 billion of retail real estate transacting. This represents a notable increase of 63% over the first half of 2019 and 142% over the first half of 2020 where only $1.9 billion and $1.2 billion transacted respectively1.

Factors such as historically strong house price growth, high consumer confidence and high levels of excess household savings all bode well for a future surge in retail spending, which would be highly positive for shopping centres.

Strong migration to regional areas and recent increases in domestic tourism spend in regional locations is also expected to drive demand for regionally-located retail shopping centres, which we believe should be more sheltered from the impacts of COVID-19 and online shopping.

Additionally, it is anticipated offshore demand for retail real estate will increase substantially when Australia’s international borders open, further underpinning yield consolidation in the sector.


What this means for investors

It is our belief that well-located and managed retail real estate will deliver superior investment returns over the next decade.

We particularly like convenience-based assets which have higher exposure to non-discretionary spend, high sales productivity and low occupancy costs reflecting rental affordability and sustainability.

Intensive management and knowledge of Australian shopping centres are increasing in importance as the rate of change in the market and consumer behaviour accelerates.


Please get in touch to arrange a discussion, and to learn more about our investment solutions for wholesale investors designed to capitalise on the Australian retail real estate sector.


Disclaimers

1. Colliers International

Important Information: This material has been prepared by MA Investment Management Pty Ltd (ACN 621 552 896) (“MA Financial Group”), a Corporate Authorised Representative of MA Asset Management Ltd (ACN 142 008 535) (AFSL 327 515). The material is for general information purposes and must not be construed as investment advice. This material does not constitute an offer or inducement to engage in an investment activity nor does it form part of any offer or invitation to purchase, sell or subscribe for in interests in any type of investment product or service. This material is intended for wholesale investors only as defined under the Corporations Act 2001 (Cth) and for informational purposes only. This material does not take into account your investment objectives, financial situation or particular needs. You should read and consider any relevant offer documentation applicable to any investment product or service and consider obtaining professional investment advice tailored to your specific circumstances before making any investment decision. Any investment in a fund will be solely on the basis of the relevant information memorandum for that fund (as updated and amended from time to time). This material and the information contained within it may not be reproduced or disclosed, in whole or in part, without the prior written consent of MA Financial Group. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners.

Nothing contained herein should be construed as granting by implication, or otherwise, any licence or right to use any trademark displayed without the written permission of the owner. Statements contained in this material that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of MA Financial Group. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this material may contain “forward-looking statements”. Actual events or results or the actual performance of a MA Financial Group financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither MA Financial Group or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. No person, including MA Financial Group, has any responsibility to update any of the information provided in this material.

© Copyright 2024 MA Financial Group. All rights reserved. The MA and MA Financial Group logos are registered trademarks of MAFG Operations Pty Ltd. We invest. We lend. We advise.’ is a trademark of MAFG Operations Pty Ltd. Facts and figures current as at 31 December 2023.
This webpage is provided by MA Financial Group Limited (ACN 142 008 428) on behalf of MA Financial Group Limited and its related bodies corporate (referred collectively as MAF) for informational purposes only and is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. Before acting on any information contained on this webpage, you should consider the appropriateness of the information having regard to your particular objectives, financial situation and needs and seek professional advice. Refer to the terms of use for further information.
Linkedin icon
Follow us