Developers major beneficiary of NSW supermarket yield compression

Title no longer a factor as yield’s break barrier.

Strong competition for NSW-based supermarkets is causing a race for investors to secure limited opportunities, resulting in soaring assets values that are no longer inhibited by their title, according to Colliers International.

NSW has only recorded 10 standalone supermarket transactions over $10 million in the last 3 years, averaging just over three transactions a year.

This relatively low figure is in stark contrast to the swelling investor demand for this asset class, with high levels of competition forcing investors to disregard the property’s title to secure one of the limited opportunities.

Over the last financial year there was not a single freehold Sydney metropolitan supermarket transaction. A lack of opportunities combined with growing investor numbers led to yields compressing by over 60 basis points in less than 9 months, with the end result being the recent sale of Coles Five Dock, a strata titled supermarket, sold by Colliers International, which broke the 5% barrier for a NSW supermarket for the first time.

Sydney Metropolitan Supermarket sales FY 16/17 (>$10 million)

 Coles Five Dock  Strata  March 2017  $19,660,000  4.89%
 Woolworths Rosehill  Community Strata  February 2017  $13,000,000  5.30%
 Woolworths Omnia  Strata  July 2016  $16,300,000  5.42%

Alex James-Elliott, Retail Investment Executive at Colliers International, says that the last 12 months have seen a closure of the gap between freehold and strata retail investments, with developers looking to maximise the value of their mixed-use projects being one of the major beneficiary’s.

“Strata has traditionally been a barrier for many retail investors. However, a continued scarcity of stock and a maturing of the investor market has been highlighted with several recent results. Said Mr. James-Elliott.

“Mixed use developers will realise a significant uplift in value, in some instances securing yields up to 300 basis points sharper than their initial feasibilities. Investor appetite for strategically located Woolworths and Coles supermarkets incorporated into mixed use development was evidenced in the sale of Coles Five Dock in which Colliers International received over 200 enquiries.”

Colliers International believe that the recent sale of Coles Pacific Pines on July 20, for $30.025 million on a yield of 4.6% signals that bigger things to come for the Sydney market.

“NSW has closed the gap on the Victorian retail investment market over the last 12 months, with the QLD market historically trading at a discount of 25 to 50 basis points”, said James Wilson, Director of Retail Investment Services at Colliers International.

“Coles Pacific Pines transaction at 4.6% sets a strong precedent along the Eastern seaboard, with the value attributed to each market would suggest Sydney metropolitan supermarkets achieving in the 4 to 4.5% range for comparable opportunities”.

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