$8675$/,$15(7$,/ ,19(670(175(9,(: $1'287/22./media/reports/australia/CW RETAIL... · CASE STUDY 1: East Village 20 CASE STUDY 2: ... Coburg, VIC $57,000,000 Jan-14 24,728 7.70% 2,305

APRIL 2015A Cushman & Wakefield [SERVICE LINE] Publication

AUSTRALIAN RETAIL INVESTMENT REVIEW AND OUTLOOKA Cushman & Wakefield Research Publication

Cushman & Wakefield advises and represents clients on all aspects of property occupancy and investment. Founded in 1917, it has 259 offices in 60 countries, employing more than 16,000 professionals. It offers a complete range of services to its occupier and investor clients for all property types, including leasing, sales and acquisitions, equity, debt and structured finance, corporate finance and investment banking, appraisal, consulting, corporate services, and property, facilities, project and risk management.The firm represents a diverse customer base ranging from small businesses to large multi-national firms. It offers a comprehensive range of services within five primary disciplines:

Leasing, including tenant and landlord representation in office, industrial and retail real estate;

Capital Markets, including property sales and acquisitions, investment banking, and corporate and investor finance;

Corporate Occupier & Investor Services, including integrated real estate strategies for large corporations and property owners;

Consulting Services, including business and real estate consulting; and

Valuation & Advisory, including appraisals, highest and best use analysis, dispute resolution and litigation support, along with specialised expertise in various industry sectors.

A recognised leader in global real estate research, the firm publishes a broad array of proprietary reports available on its online Knowledge Centre at: www.cushmanwakefield.com/knowledge

THE HERE, NOW & FUTURE OF RETAIL PROPERTYTABLE OF CONTENTSKey Findings 5Introduction 6Major Transactions 9Economic Overview and Outlook 10Investment Activity Review 12Emerging Trends in Retail Property 19CASE STUDY 1: East Village 20CASE STUDY 2: Top Ryde Shopping Centre 22Retail Investment Outlook 26

AUSTRALIAN RETAIL PROPERTY

INVESTMENT REVIEW AND OUTLOOK

CUSHMAN & WAKEFIELD 3

Westfield Sydney valued by Cushman & Wakefield Australia

4

KEY FINDINGSRetail investment activity remained strong in 2014 as investor demand increased across the subclasses and risk spectrum. Cushman & Wakefield recorded 134 major retail investment transactions (over $10 million) during 2014, with a total value of approximately $7.4 billion.

Sub-Regional and Neighbourhood shopping centres were in high demand due to their exposure to non-discretionary retailing. The Sub-Regional category dominated the asset mix with over $2.8 billion of assets traded throughout the year. This was followed by Neighbourhood shopping centres where almost $2.0 billion transacted.

The weight of capital and decreasing cost of debt continue to be the primary

driver of cap rate compression. Retail property cap rates have fallen to around 7.5% by the end of 2014 and are forecast to firm further during 2015, albeit at a moderate pace.

The compression of yields in metro locations and city centres have pushed investors to regional towns in search of higher yields.

Institutional investors were the dominant force in the market in 2014, representing more than 60% of all transactions.

2014 has seen significant selling activity by private investors while institutions and AREITs were the net buyers.

The US was the biggest foreign buyer of Australian retail property by value, followed by Singapore and China.

Offshore investors were the net buyers of over $400 million.

Retail sales growth has picked up to an above-trend pace, supported by the increase in household consumption.

Low interest rates, rising house prices and falling oil prices have been the key drivers of increased consumer spending.

Discretionary spending has picked up strongly, suggesting the end to the deleveraging process among Australian households.

The rise of food retailing, the increased adoption of mixed-use and “urban village” concept and the emergence of regional cities will be the key trends going forward.


INVESTMENT REVIEWAND OUTLOOK


INTRODUCTIONRetail property remains attractive as an asset class, with increasingly strong demand from investors.

Transaction values are at historically high levels with the depth of purchasers increasing along with the weight of funds seeking yield and capital returns.

Two transactions valued at approximately $383 million of Regional Centres changed hands last year with GPT Wholesale Shopping Centre Fund increasing its stake by 8.33% in Highpoint Shopping Centre for $154.3 million. The other transaction being a 50% sale of Stockland Townsville Shopping Centre to AMP Capital Shopping Centre Fund for $228.7 million.

Sub-Regional centres showed significant tightening of yields as investors displayed more comfort with exposure to non-discretionary spending over 2014. There remains a divergence of pricing within the subclass in part due to the disparate mix of occupancy profiles, with yields ranging between 6.23% and 9.10%. Approximately, $2.2 billion of stock traded hands last year excluding the $600 million shopping centre portfolio re-capitalisation of Lend Lease Real Estate Partners (LLREP 3). It was reported that this re-capitalisation occurred at sub 6.0% yields.

Neighbourhood centres provide an exposure to non-discretionary spending whilst being large enough to warrant institutional investor attention and were a favoured investment product for both on and offshore investors this year. Sales of Neighbourhood centres equated to approximately $2.0 billion or around 27% of total sales value. This was historically

high level of liquidity for the sub-class and influenced the overall lowering of the average sale price for shopping centres in 2014.

Cushman & Wakefield brokered Australia’s largest deal in the sector of over $152 million at a blended yield of 7.63%. The portfolio of 6 neighbourhood centres across three states highlighted the strong demand from investors.

Large Format Retail (LFR) property also witnessed repricing over 2014, particularly for those with longer WALEs to strong covenants. With approximately $568 million of transactions in the sector this sub class attracted attention from a fairly even spread of institutional and private buyers buoyed by the increased spend on the sector as house prices surged.

With increased availability of capital and increased spreads institutions continued to widen their geographical net. Dexus, Federation, ISPT and AMP are examples of large institutions which purchased regionally located centres last year.

Regional Australia is consolidating; regional towns are either turning into regional cities consolidating to hubs of employment and government back infrastructure or stagnating. With the weight of capital searching for yield, those regional cities with a diversity of industry, sufficient isolation from capital cities and population growth remain attractive propositions.

Retail as an asset class continues to evolve, particularly in metropolitan areas. The increasing yield from residential, serviced apartments, hotel and student accommodation coupled with influence from a changing planning regime is causing centre owners to rethink the redevelopment of their centres.

Shifting consumer behaviour of residential purchases is also favouring amenity, quality common areas, and ease of commute are redefining the value proposition of co-location of residential occupiers with retail uses giving rise to the “urban village”.

Shifting consumer behaviour is also favouring amenity, quality common areas, and ease of commute are redefining the value proposition of co-location of residential occupiers with retail uses giving rise to the “urban village”.

6

(SALES OVER $10 MILLION)


INVESTMENT REVIEW AND OUTLOOK


WOOLWORTHS LAKE MUNMORAH One of the portfolio of six neighbourhood shopping

centres sold by Cushman & Wakefield in 2014

MAJOR TRANSACTIONSSUPER REGIONAL SALE PRICE SALE

DATE GLAR INITIAL YIELD

$PSM GLAR PURCHASER VENDOR

Northland Shopping Centre Preston, VIC (50% Interest) $496,000,000 Jan-14 97,155 6.10% 5,105 GPT Group Canada Pension Plan

Investment Board

REGIONAL SALE PRICE SALE DATE GLAR INITIAL

YIELD$PSM GLAR PURCHASER VENDOR

Stockland Townsville Shopping Centre Aitkenvale, QLD (50% interest)

$228,700,000 Oct-14 58,681 6.25% 3,897 AMPCSC Australia Stockland

Highpoint Shopping Centre Maribymong, VIC (8.33% Interest) $154,300,000 Sep-14 153,900 5.50% 12,036 GPT Wholesale Shopping

Centre Fund (GWSCF) Besen Family

SUB REGIONAL SALE PRICE SALE DATE GLAR INITIAL


Mt Ommaney Shopping Centre Brisbane, QLD $416,250,000 Oct-14 57,000 6.25% 7,303 Federation Centres (25%) / TIAA

Henderson Real Estate (75%) AMP Capital

Bendigo Marketplace Bendigo, VIC, AU $165,000,000 Jan-14 24,398 7.30% 6,763 ISPT Colonial First State

Arndale Central Shopping Centre Adelaide, SA $152,000,000 Sep-14 37,000 7.90% 4,108 Armada Funds Management Federation Centres

Waverley Gardens Shopping Centre Mulgrave, QLD $139,500,000 Jul-14 38,169 8.50% 3,655 Blackstone Mirvac Group

Golden Grove Village Shopping Centre Golden Grove, SA

$129,100,000 Jul-14 33,109 7.41% 3,899 Challenger David Fitch

NEIGHBOURHOOD SALE PRICE SALE DATE GLAR INITIAL


Woolworths Portfolio (6 centre) $152,175,000 Feb-14 32,380 7.63% 4,717 Rockworth Capital Partners Woolworths

Norwest Marketown Baulkham Hills, NSW $120,000,000 Dec-14 11,492 4.80% 10,442 Mulpha International Bhd Goodwin & Kenyon

Pty Ltd

Burwood Plaza Burwood, NSW $80,000,000 Nov-14 12,361 5.50% 6,472 Holdmark Developers Centuria Property

Trust

Currambine Central Shopping Centre Currambine, WA $74,000,000 Dec-14 9,525 7.00% 7,769 Federation Centres White & Partners

Pty Limited

Chevron Renaissance Shopping Centre Surfers Paradise, QLD $71,000,000 Dec-14 13,076 n/a 5,430 Precision Group Arena (Morgan

Stanley)

LARGE FORMAT RETAIL SALE PRICE SALE DATE GLAR INITIAL


Lincoln Mills Homemaker Centre Coburg, VIC $57,000,000 Jan-14 24,728 7.70% 2,305 BWP Trust Baron Corp

Harvest Retail (Estate One) Dandenong North, VIC $54,300,000 Nov-14 18,677 7.25% 2,907 Rfici Group Cbus Property

Lidcombe Power Centre Lidcombe NSW $52,000,000 Jun-14 36,000 n/a 1,444 Newmark APN Auburn Property

FundSpotlight Retial Group

Bunnings Maroochydore Maroochydore, QLD $42,125,000 May-14 5,000 n/a 8,425 Newmark Property Group Wesfarmers

Lake Haven Mega Centre Lake Haven, NSW $40,500,000 Oct-14 27,870 8.74% 1,453 Altis Property Partners Lake Haven

Megacentre Pty Ltd

WOOLWORTHS LAKE MUNMORAHOne of the portfolio of six neighbourhood shopping

centres sold by Cushman & Wakefield in 2014




ECONOMIC OVERVIEW AND OUTLOOKOVERVIEWIMPROVED HOUSEHOLD CONSUMPTION SUPPORTED INCREASES IN RETAIL SALES

The Australian retail sales growth has picked up to an above-trend pace toward the end of 2014, supported by the increase in household consumption. Retail sales volumes increased by 3.6% in 2014, which is above the 10-year trend growth of around 2.8% from our analysis. Falling interest rates, rising house prices and a significant decline in oil prices have had a positive effect on household consumption, which in turn has boosted retail sales volumes.

Low interest rates have had a positive effect on retail sales. The Reserve Bank of Australia’s (RBA) cash rate falling from around 7.25% in 2008 to around 2.5% by the end of 2014. These sustained low interest rates are boosting consumer confidence and spending both directly and indirectly. Low interest rates mean consumers have greater access to credit and hence increase their spending. Indirectly, the sustained low interest rates have been a major contributor to the surge in house prices, which in turn has increased household wealth and the propensity to spend.

Spending has been rising at a faster rate than household incomes resulting in the gradual decline in savings. The saving rate has fallen from around 11% in 2013 to

around 9% by the end of 2014 and is forecast to decline further, signalling the end of deleveraging. This decline in household savings has been further supported by the strong growth in the residential markets.

Growth of housing prices in Australia have averaged around 8% over the last few years, with Sydney and Melbourne experiencing the strongest growth. As housing is the dominant component of wealth for a typical Australian household, the wealth effect derived from the recent surge in house prices has become apparent. Despite subdued consumer confidence indicators, consumption growth has been particularly strong in New South Wales and Victoria, correlating with the strongest growth in the residential markets.

Oil prices have fallen significantly since June 2014. From 2010 to mid-2014, oil prices were fairly stable at around US$110 a barrel, but since June prices have fallen by more than 50% to around US$50 a barrel by the end of 2014. As Australia is a net oil importer, the substantial decline in oil prices is having a positive impact on the Australian economy and households. A fall in petrol prices means Australian households have more disposable income to spend on other goods, which further support retail sales. The RBA has estimated that the fall in the price of petrol would help to boost real household disposable income by 0.5% in the first quarter of 2015.

Among the discretionary items, spending on hotels, cafes and restaurants has recorded the strongest growth in 2014, growing by almost 8% yoy to reach around $14.9 billion.

10

Quarterly Sales Non-discretionary Discretionary Year-ended sales

Retail sales have picked up

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

...supported bystrong growth in

discreationary spending

10-year trend

THE RETURN OF DISCRETIONARY SPENDINGThe recent improvement in retail sales volumes have been largely supported by an increase in discretionary consumption. Growth of discretionary spending has picked up from its low of -0.3% in June 2013 to 3.0% by the end of 2014. Among the discretionary items, spending on hotels, cafes and restaurants has recorded the strongest growth in 2014, growing by almost 8% yoy to reach around $14.9 billion. The increase in non-essential spending has occurred in spite of the low consumer sentiment . While households continue to hold pessimistic views of their financial situation and economic conditions, the real increases in their discretionary spending would deliver a positive impact on the retail sector and we expect this trend to continue going forward. Sources: C&W, ABS, Oxford Economics

RETAIL SALES GROWTH (VOLUME)




INVESTMENT ACTIVITY REVIEWCAPITAL AND PRICING TRENDS

STRONG INVESTMENT ACTIVITY REFLECTED INVESTOR CONFIDENCEThe total retail investment volume in 2014 reached almost $7.4 billion, with the majority of transaction volume ($2.6 billion) recorded in the last quarter of 2014. Cushman & Wakefield has recorded a total of 134 retail property transactions throughout the year, reflecting an average deal size of $55 million and a weighted average price per sqm of $4,800. The robust investment volume over 2014 has reflected the strong investor confidence in the retail property market in Australia.

CAP RATES ARE COMPRESSING BUT YIELD SPREADS ARE TRENDING UPWARDThere has been a continual compression of capitalisation rates across the national retail property market since September 2013. Over the course of 2014, we have seen ~65-120 bps of cap rate compression for retail property as the weight of capital intensified. The yield spread premia, on the other hand, has been on an upward trend given that the bond yields have been falling at a faster pace than the cap rates. This is in response to the sustained low interest rate environment brought about by the expansionary monetary policy implemented by the RBA in order to boost economic growth.

Over the course of 2014, we have seen ~65-120 bps of cap rate compression for retail property as the weight of capital intensified.

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14

Sources: C&W

0

5

10

15

20

25

$0

$4,000

$8,000

$(

Milli

on)

Culmulative Value

Pre-reporting spike

Pre-reporting spike

Volume (LHS) No. of transactions (RHS)

Source: Cushman & Wakefield

TOTAL RETAIL PROPERTY TRANSACTIONS IN 2014

12

Sources: C&W, RCA

Yield spread (bp) Cap rate Bond yield YoY change in cap rate (bs)

-200

-100

0

100

200

300

400

500

600

-3.5%

0.0%

3.5%

7.0%

10.5%

2008 2009 2010 2011 2012 2013 2014

bps

Cap rates are compressing while yield spreads widen...

...in response to falling bond yields.

1st phase of compression 2nd phase of compression

RETAIL PROPERTY PRICING TRENDS: 2008 - 2014

Our analysis shows that there have been two episodes of cap rate compression in the retail property market since 2008. The first phase of cap rate compression occurred from early-2010 until mid-2011 and the second phase started since the end of 2013. The dynamics of the two phases however are quite different. While the first phase of cap rate compression was primarily driven by positive market expectation as the economy transitioned out of the GFC. The second period of compression was driven largely by strong monetary stimulus by the RBA

keeping interest rates at record lows. We expect cap rates to continue to move southward, albeit at a moderate pace, in the foreseeable future for two key reasons: (1) the RBA would remain on the expansionary mode in order to boost the economy and create jobs, and (2) market conditions would improve, partly due to the stimulus program. The Australian retail property investment market has not been driven by offshore capital when compared to the office sector but rather local institutional investors and A-REITs looking to expand or re-weight their property portfolios.




INVESTMENT ACTIVITY BY CATEGORY

SUB-REGIONAL, AND NEIGHBOURHOOD CATEGORIES DOMINATE INVESTMENT ACTIVITYThe Sub-Regional category dominated the asset mix with over $2.8 billion of assets traded throughout the year, representing 37% of the total transaction value in 2014, followed by the Neighbourhood category at almost $2.0 billion (27%). The strong investment appetite for the Sub-regional and Neighbourhood shopping centres have been driven by their attractive yields on offer.

In terms of transaction numbers, the Neighbourhood shopping centre category was the most active sub class in 2014. The Neighbourhood category accounted for the majority of recorded sales, representing 52% of the total number of transactions, followed by the Sub-Regional (17%) and Freestanding (11%).

STRONG INVESTMENT APPETITE FOR SUB-REGIONAL SHOPPING CENTRES IN VICTORIAThere has been a strong appetite for Sub-Regional shopping centres in Victoria in 2014. Three of the largest five sub-regional shopping centre transactions were located in Victoria close to $770 million of these assets changed hands, with the majority of the buying by institutional groups.

The largest sub-regional shopping centre sale was Mt Ommaney Shopping Centre in QLD from AMP Capital to a Joint Venture (JV) between Federation Centres (FDC) and TIAA Henderson Real Estate for $416 million. Other major transactions included the purchase of the Bendigo Marketplace Shopping Centre in Victoria by ISPT from Colonial First State for $165 million ($6,763/sqm). Our analysis of this transaction reflects an initial yield of 7.3%, equivalent yield of 7.4% and an IRR of 9.0%. ISPT also bought a half share in Waurn Ponds Shopping Centre also in Victoria, for $63 million ($4,688/sqm) from Australian Unity, making it one of the most active buyers in the retail property market last year.

Other significant transactions in 2014 included the sale of Federation Centres’ owned Mildura Central Shopping Centre (VIC) to Novion Property Group for $109.75 million ($5,434/sqm) at an initial yield of 6.9% and Waverley Gardens Shopping Centre (VIC) sale of Mirvac Group to Blackstone for $139.5 million ($3,655/sqm) as part of a larger portfolio deal that included various commercial office assets as well.

ROBUST RETAIL PORTFOLIO ACTIVITY Portfolio activity remained strong in 2014 with one of the major portfolio transactions in 2014 brokered by Cushman & Wakefield in excess of

Sub Regional Neighbourhood37% 27%

Other Retail Large Format Retail9% 8%

Super Regional Regional7% 7%

City Centre5%

Freestanding2%

Sub Regional Neighbourhood19% 52%

Other Retail Large Format Retail4% 11%

Super Regional Regional1% 2%

City Centre4%

Freestanding7%

RETAIL PROPERTY TRANSACTIONS IN 2014

BY VALUE (AUD MILLION) BY VOLUME (NO. OF TRANSACTIONS)

14

$152 million at an initial fully leased yield of 7.6% (excluding the value of excess development land). This deal involved a complex negotiation between Rockworth Capital Partners and Woolworths, which concluded in the sale and leaseback of six (6) neighbourhood shopping centres located in New South Wales, Queensland and Victoria. The transaction reinforces the strength of demand for investment grade assets in Australia. The strong price achieved demonstrates the continued appeal of

the defensive nature of non-discretionary retail. It also shines the spotlight again on the weight of offshore money interested in Australian commercial property.

Last year has also seen Lend Lease Investment Management refinancing its $600 million portfolio which comprised five sub-regional centres. The five assets include; Menai Marketplace (NSW), Settlement City (NSW), Southlands Boulevarde (WA), Armadale Shopping

City (WA) and Northgate Shopping Centre (WA). The fund initially placed the portfolio on the market but opted for the recapitalisation and retainment instead.

NON-METRO RETAIL LOCATIONS OFFER HIGHER YIELDS THAN METRO LOCATIONSWe have recorded strong investor demand for shopping centres in non-metro locations throughout 2014. This was driven primarily by the attractive yields on offer for shopping centres in those locations and the opportunity for exposure to non-discretionary retailing. Our analysis shows that non-metro shopping centres have traded at ~60 bps premium over metropolitan locations. Non-metro shopping centres have also been trading at significantly lower prices ($3,726/sqm on average) compared to metro locations ($5,985/sqm on average). In regard to shopping centre types, City Centres are consistently the most expensive asset class, trading at 5.9% average initial yield and $20,479 on

RETAIL PRICING MATRIX BY ASSET CLASS

INITIAL YIELD PRICE PER SQM

Metro 7.33% $5,985

Non-Metro 7.92% $3,726

Large Format Retail 8.42% $2,226

Neighbourhood 7.84% $4,386

Sub Regional 7.61% $4,135

Freestanding 6.61% $3,792

City Centre 5.88% $20,479

WOOLWORTHS ROTHWELL One of the portfolio of six

neighbourhood shopping centres sold by Cushman &

Wakefield in 2014




average per sqm. This surge in demand for regional locations is reflected in the high number of transactions in the less than $50 million price range, which accounted for almost 68% of total sales last year. We believe this trend will continue as the high prices of retail assets in City Centres and metropolitan locations will force investors to seek opportunities in regional locations moving forward.

INVESTMENT ACTIVITY BY STATE

VICTORIA LED THE NATION IN RETAIL PROPERTY SALES BY DOLLAR VALUEVictoria recorded the highest retail transactions by total sales at over $2.1 billion, representing 31% of total retail transactions by value; followed by New South Wales at over $1.97 billion (30%) and Queensland at over $1.87 billion (28%). However, with over 46 retail centres traded, there was more retail property sold in New South Wales than any other state in 2014. The average value of shopping centres in Victoria was $62 million, compared to the equivalent of $51 million for Queensland and $43 million for NSW.

HIGH LIQUIDITY IN QUEENSLAND AND VICTORIACushman & Wakefield further revealed that retail property investors had invested more in Queensland and Victoria relative to the retail turnover weights of these states in 2014. The investment activity analysis by state shows that the total capital allocation to Queensland and Victoria were 7.5% and 6.7% in excess of their retail turnover market shares respectively. In contrast, the proportion of investment into Western Australia has been significantly (8.7%) lower than its proportion of the total retail sales. This could be attributed to the bearish market sentiment on the Western Australia property market as a result of the fading mining investment and falling iron ore prices.

RETAIL PROPERTY TRANSACTIONS BY SIZE

TRANSACTIONS BY SIZEVALUE

OF SALES (IN AUD MILLION)

AS % OF TOTAL VALUE

NUMBER OF

SALES

AS % OF TOTAL

VOLUME

Less than $50 million $2,090 28.3% 91 67.9%

$50 million - $100 million $1,853 25.1% 28 20.9%

$100 million - $150 million $769 10.4% 6 4.5%

$150 million - $200 million $621 8.4% 4 3.0%

More than $200 million $2,051 27.8% 5 3.7%

TOTAL $7,384 100.0% 134 100.0%

Proportion of Retail Transactions and Retail Turnover in 2014

Sources: C&W, ABS

0%

5%

10%

15%

20%

25%

30%

35%

NSW VIC QLD WA SA TAS ACT NT

Retail turnover Retail property sales

Overweight in VIC & QLD

Underweight in WA

31%VIC

30%NSW

28%QLD

6%SA

3%WA

1%TAS

1%ACT

Sources: C&W, RCA

35%NSW

27%QLD

26%VIC

5%WA

4%SA

2%TAS

1%ACT

RETAIL TRANSACTIONS BY STATE

BY VALUE BY NUMBER OF TRANSACTIONS

PROPORTION OF RETAIL TRANSACTIONS AND RETAIL TURNOVER IN 2014

16

PURCHASERS

LOCAL INSTITUTIONS WERE THE MAJOR DRIVER OF ACTIVITY SNAPPING UP SUB-REGIONAL AND NEIGHBOURHOOD SHOPPING CENTRESLocal institutions dominated the Australian retail property investment landscape in 2014, making 66 purchases totalling $4.8 billion. These investors favoured Sub-Regional shopping centres, representing 25% of total purchases with a total value of almost $1.9 million, followed by Neighbourhood shopping centres (13%). In terms of location, Victoria represented approximately 30% of institutional purchases by value, followed by NSW (27%) and QLD (20%).

Foreign buyers accounted for less than 10% of the total transaction value in 2014. This is in contrast to their strong participation in the office sector. Cushman & Wakefield’s analysis reveals that in 2014 foreign capital has accounted for 40% of total commercial property

transactions in Australia with 60% of that invested in office buildings. The lack of interest by offshore investors in the retail property market could be attributed to the fact that retail is a specialised asset class with complex lease structures and requires local knowledge and

management expertise. We believe as competition in the office market intensifies and office property yields firm further, offshore investors would have to consider alternative assets such as retail in search for higher yields.

21% Private Investor

65% Institution

14% REIT

25% Sub Regional

13% Neighbourhood

7% Other Retail

7% Super Regional

5% Regional

4% Large Format Retail

3% City Centre

1% Freestanding

PURCHASERS BY TYPE


LOCAL VERSUS OFF-SHORE BUYERS

86%Local

8%Offshore

6%Local

/Offshore JV

86%Local

8%Offshore

6%Local

/Offshore JV


TOP 10 PURCHASERS

RANK BUYER TOTAL VALUE

NUMBER OF ACQUISITIONS

1 GPT Group $650,300,000 22 ISPT $482,333,632 10

3Colonial First State (Novion Property Group) $348,450,000 5

4 Federation Centres $322,612,500 65 TIAA Henderson Real Estate $312,187,500 16 Mirvac Group $310,000,000 17 Charter Hall $261,200,000 38 Dexus $230,295,000 3 9 AMPCSC Australia $228,700,000 110 Challenger Life $154,751,000 2




CO-OWNERSHIP AND CAPITAL PARTNERSHIP HAS BEEN A KEY FEATURE Many of the major players have employed the co-ownership or capital partnering strategy in order to spread the risks and diversify their exposure. Some key examples include the alliances of ISPT with Coles and the joint venture between Federation Centres and TIAA Henderson.

In 2014, ISPT engaged in 10 retail property transactions totalling $473 million. The superannuation fund-backed group in recent times has made most of its acquisitions though owner-operator strategic partnerships with Coles. Federation Centres also entered into a co-ownership arrangement with TIAA Henderson to acquire the Mt Ommaney Shopping Centre for a total price of $416 million. Under the arrangement TH Real Estate would hold 75% and Federation would own 25% of the centre, with Federation providing property management services at the centre.

OFF-SHORE BUYERS ACTIVITY

THE US WAS THE BIGGEST FOREIGN BUYER OF AUSTRALIAN RETAIL PROPERTY In 2014, the US, was the biggest buyer by value of retail property in Australia, accounting for almost half of the total transaction value by foreign entities. The rest of foreign capital investment into Australian retail property was from Asia Pacific countries, with Singapore (17%), China (14%), Malaysia (14%) and Taiwan (7%) being the major sources of capital.

It was evident that there is a distinctive difference in buying behaviours among investors from China and other countries. While investors from China were targeting assets in the $10-30 million bracket, those from the other countries (US, Singapore, Malaysia) were purchasing properties in the $50 million plus price range.

The Eastern Seaboard of Australia was the top market destination for foreign capital, with Sydney (8 transactions) being

the most sought after market, followed by Brisbane (7) and Melbourne (2).

VENDORS

PRIVATE INVESTORS WERE THE NET SELLERS WHILE OFFSHORE INVESTORS WERE ON THE NET BUYING SIDECushman & Wakefield has noticed the increase in the selling activity of private investors. On a net transaction basis, private investors have sold a total of approximately $800 million while Institutions and A-REITs have been on the net buyer side. On the other hand, offshore investors have ended the year on

a net buying position of around $400 million reflecting their appetite for the Australian retail property market and its attractive relative yields.

CAPITAL RECYCLING IS A KEY STRATEGY AMONG MAJOR INVESTORS Capital recycling has been a key strategy among a number of institutional investors in Australia in 2014. A number of vendors have used proceeds from sales of some properties in their portfolios to finance purchases of new properties. Key examples include Federation Centres, Mirvac, Stockland, Novion and SCA.

Federation Centres have been very active, selling $348 million worth of asset while expanding its property portfolio by $323 million in 2014. Many of these centres were sold into strategic partnerships and joint ventures, with FDC retaining operating and management rights. The group is also undergoing merger with Novion Property Group. The merger, if successful, will create the second biggest retail REIT in Australia after Scentre, the former Westfield Retail Trust, and a top 10 REIT globally with a market capitalisation of over $11 billion.

TOP 5 OFFSHORE PURCHASERS

RANK BUYER COUNTRY ACQUISITION VALUE

NUMBER OF CENTRES

1 TIAA HENDERSON REAL ESTATE (75% of FDC/TIAA JV) US $312,187,500 1

2 ROCKWORTH CAPITAL PARTNERS Singapore $152,175,000 6

3 BLACKSTONE US $139,500,000 1

4 MULPHA INTERNATIONAL BHD Malaysia $120,000,000 1

5 WEN FAMILY Taiwan $53,250,000 1

Net transaction positionType of investors

-$1,000 M-$500 M

$ M$500 M

$1,000 M

Institution PrivateInvestor

REIT

Net position

Source of capital

-$600 M-$400 M-$200 M

$ M$200 M$400 M$600 M

Local Off-ShoreNet position

NET TRANSACTION POSITIONTYPE OF INVESTORS SOURCE OF CAPITAL

48%US

17%Singapore

14%China

14%Malaysia

7%Taiwan

48%US

17%Singapore

14%China

14%Malaysia

7%Taiwan

OFF-SHORE CAPITAL SOURCES

18

EMERGING TRENDS IN RETAIL PROPERTYTHE RISE OF FOOD RETAILING The structural decline in department stores over the last decades has forced shopping centre operators to search for alternative anchor tenants. Supermarkets, food courts and restaurants have been emerging as alternative anchors as they are less affected by economic conditions and online retailing. The share of food retailing in total retail turnover sales has gradually increased from 34% in 1984 to 41% in 2014, while cafes, restaurants and food services turnover share has increased from 10% in 1984 of the total retail sales to 14% in 2014. On the other hand, the proportion of department stores sales has fallen from 14% from 1984 to 6% in 2014.

MIXED-USE, MIXED-USE, MIXED-USERecent years have seen the mixed-use development concept becoming more popular among property developers as the demand to live, work and recreate in one location continues to grow in Australia. Mixed-use development is the key for many developers to unlock the latent economic value of their sites. Retail tenants would benefit from the increased customer traffic generated by the complementary uses, while residents, hotel guests and office workers are attracted by the convenience of dining, retail and entertainment venues on the site.

Retail property developers in Australia have also strongly embraced the mixed-used concept for retail development. Shopping centres are

turning into the ‘modern village’ with a high level of self-containment for people living, working and recreating in the same area. Retail is at the core of any mixed-use development and helps facilitate strong community institutions and interaction. Prime examples among others include East Village, Top Ryde Shopping Centre and Central Park in Sydney, Gasworks Plaza in Brisbane and Chadstone in Melbourne.

ENGAGEMENT OF INSTITUTIONAL INVESTORS IN REGIONAL TOWNSRenewed interest in retail centres in regional cities, which benefit from population inflows from smaller towns, is becoming apparent. This is due to the greater availability of commercial and other services, public sector investment and more diverse economic drivers. Stronger population growth in the larger towns is evident due to the long-term decline of some rural industries and population shifts following the end of the mining boom.

Many institutional investors have been actively engaging in this process, with major companies investing in these towns such as Dexus (Sturt Mall) at Wagga Wagga and Colonial First State at Bathurst (Bathurst City Centre). Our research reveals that $3.3 billion worth of shopping centres in regional areas has changed hands in 2014, representing 43% of the total transaction value.

Food retailing

Household goods

Clothing, footwear and personal accessory

Department stores

Cafes, restaurants and takeaway food services

Others

2014200419941984

THE RISE OF FOOD RETAILING




EAST VILLAGEEast Village is a mixed use residential, retail and commercial precinct combining 206 leading edge apartments with a unique and vibrant market place offering opportunities for people to meet, mingle, shop, dine out and enjoy a range of leisure options.

East Village has set the benchmark for mixed-use development, rejuvenating Victoria Park by creating an “urban soul” that was previously lacking; a destination point that provides a place to work, eat and play.

Approximately 74% of the retail GLAR is dedicated to food-oriented tenancies, including fresh food, cafes and restaurants. The remaining space comprises retail service based tenancies with an optometry practice, hairdressing and financial services. The Coles supermarket is believed to be one of the top performing stores of the supermarket chain in Sydney.

TRADE AREA SNAPSHOTThe following observations are based on data from the 2011 ABS Census:

• Demographic profile is affluent, educated, younger and growing fasterthan the Sydney average.

• Over 6,500 units are within closeproximity to the centre and accountsfor the high 60% walk-in consumers.

• When comparing the Zetland area tothe NSW average (see table below), the locality sees almost double the number of overseas-born residents- a phenomena which is seen to be replicated across many of the transportnodes in metropolitan Sydney.

CASE STUDY

L8 SKY PARK

L7

L6

L5

L4 VIRGIN ACTIVE, COMMERCIAL, CHILD CARE & RESIDENTIAL CAR PARKING

L3 VIRGIN ACTIVE

L2 SKY PHOENIX, AUDI SHOWROOM & COMMERCIAL

L1 MEDICAL CENTRE RETAIL

G

LG1 PARKING

LG2 PARKING

RESIDENTIAL RESIDENTIAL

EAST VILLAGE STACKING

PLACE OF BIRTH 2011

ZETLAND NSW

PEOPLE PEOPLE

Australia 1,646 43.2% 4,747,371 68.6%

Overseas 1,751 45.9% 1,778,550 25.7%

Not Stated 415 10.9% 391,737 5.7%

Residential and Commercial Cars AccessPedestrian Access

Indicative only

Retail Car Access

Source: ABS CENSUS 2011

20

TENANT MIX

AREA (SQM)*

Coles 4,015

Sky Phoenix 1,300

Virgin Active 4,850

Childcare Centre 1,200

Specialties and Other 6,400

Commercial (audi Australia showroom) 13,400

Other Commercial 3,050

TOTAL 33,015

Retail parking 692

3KM RING

EAST VILLAGE

5,716 sqmTOTAL LAND AREA

RETAIL DYNAMICS• Visitation times are low and frequent

– demonstrating a strong bias to convenience shopping.

• East Village Shopping Centre’s position as a hub for fresh food, including artisanal stores, health & lifestyle, cafes and restaurants.

• Dynamic outdoor space creates a community entertainment and leisure space.

INTEGRATION WITH RESIDENTIALAn inspired and integrated residential, retail and dining precinct, East Village also houses commercial office space on the mezzanine levels and 206 low-rise residential apartments on the upper floors above a 6,500sqm Sky Park creating an urban oasis for recreation and relaxation.

The urban village comprises 1,183 car spaces, with 692 of those spaces dedicated to retail parking (equates to 58% of total car spaces). The parking between retail and residential is completely seperate in regards to both

entry and location within the complex. The public retail car park is located on the lower two basement levels, while the private residential parking is located on the upper floors.

Parking is accessed via a number plate recognition system allowing shoppers and commercial occupants/visitors ease of access and egress. Pedestrian access to

the residential is via four seperate residential lobbies, which are separately accessed from the street.

The above design mitigates issues associated with shared access and noise from shoppers and goods loading for the retailers. Additionally, this provides security and separation from the retail and traffic below.

* Estimates only




TOP RYDE STACKINGTOP RYDETop Ryde City, comprises a Regional Shopping Centre which was constructed in three stages between 2009 and 2010. Stage one was completed in November 2009, with stage two completed in March 2010 and stage three completed in August 2010. The improvements comprise a part open air and part enclosed five levels.

The Centre is complemented by a 7 tower, 653 residential complex located directly above the centre.

TRADE AREA SNAPSHOTThe following observations are based on data from the 2011 ABS Census:

• Demographic profile is affluent, educated, younger and growing faster than the Sydney average.

• When comparing the Ryde area to the NSW average (see table below), the locality sees almost double the number of overseas-born residents - a phenomena which is seen to be replicated across many of the transport nodes in metropolitan Sydney.

PLACE OF BIRTH 2011

RYDE NSW

PEOPLE PEOPLE

Australia 54,661 53.0% 4,747,371 68.6%

Overseas 43,538 42.3% 1,778,550 25.7%

Not Stated 4,839 4.7% 391,737 5.7%

CENTRE DYNAMICS• Visitation times are low and frequent

– demonstrating a strong bias to convenience shopping.

• Fresh food hub – positioned as a fresh food hub for the upper North Shore.

• La Piazza & La Strada – Outdoor dining, retail, community areas and leisure space present an alternative convenient offering for shoppers.

• 653 Residential apartments above the centre provide a ready customer base

– particularly for after-work dining, entertainment and fresh food.

ENTERTAINMENT & DINING‘La Piazza’ presents shoppers and residents a dining, entertainment and community precinct offering an open public space commonly found in the heart of a traditional town. Shoppers and residents can make use of the family entertainment areas during the day, featuring a large screen television and children’s play areas and rides, and take advantage of the late night dining precinct in the evenings. This is reflective of a shift in retail shopping centres towards entertainment and experience to draw shoppers in, in an effort to combat online retailing and retain customer loyalty.

INTEGRATION WITH RESIDENTIALThe centre’s ‘wedding cake’ design (see Stacking Plan) positions the shopping centre car park in the basement, followed by retail floors which are capped by another stratum of car parking. This presents a buffer for the residential from the commercial operations below.

L5 RESIDENTIAL RESIDENTIAL RESIDENTIAL

L4 CINEMA

L3 CINEMA GYM FITNESS FIRST

RESIDENTIAL PARKING

L2 PARKING PARKING

L1A PARKING EVENT CINEMA & MYERL1 PARKING

G RETAIL MYER Devlin Street

LG1A PARKINGBIG W

LG1 PARKING

LG2A PARKINGWOOLWORTHS

LG2 PARKING

BP1 PARKING

BP2 PARKING

BP3 PARKING

Indicative only

Source: ABS CENSUS 2011

CASE STUDY

22

The design mitigates issues associated with shared access and noise from shoppers and retail loading areas. Additionally, this offers security to the occupants of the residential component.

TOP RYDE RESIDENTIAL The Sydney-based Crown Group began construction of the seven towers in late 2010 and completed construction in mid-2014.

The resort-style development houses more than 600 residents above the shopping centre, positioned with views to the Sydney Harbour Bridge, the Blue Mountains and the North Shore.

As the last apartment sold in late 2014, Crown Group CEO Iwan Sunito remarked, “For a development of this scale to sell out so shortly after completion is a testament to the high quality and luxury appeal we have worked to deliver”.

Outside of the quality of the design and finishes, Top Ryde City Living’s success is underpinned by its access to transport links, education, workplace hubs and retail.

TENANT MIX

AREA % OF AREA

Myer 10,753 14%

Big W 8,207 11%

Woolworths 4,240 6%

Event Cinemas 3,117 4%

Fitness First 3,096 4%

Specialties & Other 46,120 61%

TOTAL 75,532

Retail Parking 3,055 4.04:100

Residential 653 Apartments

7 Towers

TOP RYDE

34,420 sqmTOTAL LAND AREA

11KM RING

Top Ryde City Living’s success is underpinned by its access to transport links, education, workplace hubs and retail.

Top Ryde Shopping Centre valued by Cushman & Wakefield Australia




DESIGN AND AMENITYTop Ryde City Living is an excellent example of the how common area amenity (if delivered thoughtfully and tastefully) can compensate for compact design. Though the apartments are compact in design, they have been embraced by consumers as they move away from owning luxury to experiencing it.

Common areas such as a piano room, library, expansive break out areas and a podium-level swimming pool create an oasis-like environment completely removed from the active retail centre below. In addition, residents can access the centre in a secure and safe manner with dedicated residential lifts.

TOP RYDE CITY LIVING - ALPHAIn 2011, Top Ryde City Living’s one bedroom apartments initially sold for as low as $350,000 upon first offering. Comparatively, the final apartment one bedroom plus study sold for $754,000 in late 2014.

C&W have analysed the average sales prices since 2011 from first sale to the final sale in 2014 (see table). Comparing these figures to ABS data (Beta), we note that the product has displayed significant outperformance (see graph – Alpha).

This outperformance can be attributed to the quality of product and marketing process, but more importantly the success of this development demonstrates that the market is supportive of the “Urban Village” environment.

Growth Over thePeriod

0%

35%

70%

ALPHA

ALPHA

AnnualisedGrowth

Residential Property Price Index, Sydney

Top Ryde City Living

RATE PSM TOTAL GROWTH

TOTAL YEARLY

GROWTH

TOP RYDE CITY LIVING

2011 430,000 8,600

2014 700,000 14,000 62.80% 17.60%

RESIDENTIAL PROPERTY PRICE INDEX • SYDNEY

2011 101.0

2014 133.5 32.20% 9.70%

TOP RYDE CITY LIVING ALPHA 95.10% 81.00%

Consumers are moving away from owning luxury to experiencing it.

Sources: C&W, ABS

24




RETAIL INVESTMENT OUTLOOKDEMAND FOR EXPOSURE TO THE RETAIL SECTOR IS EXPECTED TO CONTINUEWith ample capital and widening yield spreads, transaction levels remain at historically high levels. We expect the demand for exposure to the sector to continue, increasing competition for stock in 2015.

Despite the strong demand and increasing competition, we expect that the major yield shift witnessed in 2014 to moderate this year particularly in core markets. However, we believe that there remains room to tighten spreads between core and secondary stock as purchasers compete for exposure in an increasingly crowded market.

This will necessitate a shift in geographical remits and diversity of the types of retail being sought by purchasers. Many of these will be opportunity led requiring a more entrepreneurial approach to secure stock. This may involve mixed use assets, taking on development risk, forward funding or for the larger player’s corporate activity.

For the larger assets we expect that Capital Partnering will be the feature of 2015 with many larger owners

undertaking development work or deleveraging their balance sheets. With superannuation funds, Sovereign Wealth Funds (SWF) and off-shore entities all requiring management expertise to extract value from these assets there will be no shortage of suitors.

We view assets which have been neglected of capital potentially held in private hands as a major target for smaller institutions, syndicates and unlisted funds in 2015. We therefore expect that the private sector will provide much of the liquidity this year.

RECOGNITION OF THE MIXED-USE ASSET MODEL AS AN INSTITUTIONAL GRADE RETAIL INVESTMENTTraditionally, there has been a reluctance from institutional investors to support the purchase of retail property within integrated developments in the Australian market.

In November 2012 Top Ryde Shopping Centre was put to market. The sales process was hotly contested and concluded in the Deutsche Bank funded Blackstone Group’s acquisition.

More recently we have witnessed ISPT (Dee Why Grand), SCA Property Group (Clemton Park) and Charter Hall (Pacific Square) all acquiring well positioned stratum retail assets. Furthermore, we continue to witness purchases with historically tight yield profiles underwritten by the potential to add residential and other uses to the site.

Examples such as Burwood Plaza (Holdmark Property Group), Big Bear Shopping Centre (Off Shore Purchaser reportedly in Due Diligence at the time of writing) and Surry Hills Shopping Village (currently on market) all expressing income yields of between ~3.0-5.5%. We expect this trend to continue through 2015 and beyond.

Institutional investors now support the purchase of retail property within integrated developments in the Australian market.

26

27CUSHMAN & WAKEFIELD

For more information about Research and Retail Investment please contact:

Nicholas PotterSenior DirectorNational Retail Investments+61 2 9229 [email protected]

Sashi MakkapatiSenior Director National Retail Investments+61 2 9229 [email protected]

Kelsey ShanahanMarketing & Research AnalystCapital Markets+61 2 9223 [email protected]

Alex Pham PhD AAPIResearch ManagerResearch & Consultancy+61 2 9229 [email protected]

APRIL 2015

www.cushmanwakefield.com

Documents

$8675$/,$15(7$,/ ,19(670(175(9,(: $1'287/22./media/reports/australia/CW RETAIL... · CASE STUDY 1: East Village 20 CASE STUDY 2: ... Coburg, VIC $57,000,000 Jan-14 24,728 7.70% 2,305