Commercial & Industrial Property News Update

Australia - Retailers Fast Becoming New Breed Of Property Investors

August 14, 2012

With more than AUD 1 billion in assets each, retailers like Woolworths, Harvey Norman and Coles are emerging as contenders for investor dollars.

A new breed of property investors is emerging in the Australian commercial real estate market. Retailers like Woolworths, Harvey Norman and Coles - with assets of around AUD 1 billion each - are predicted to compete with traditional retail real estate investment trusts (REITs) and landlords for investor dollars.

Assets held by retailers range from stand-alone shops to pubs, bottle shops and industrial warehouses, and may even be split off as separate listed vehicles - as Wesfarmers did with the Bunnings Warehouse Property Trust.

The forming of new trusts will mean a completion of a cycle begun 20 years ago, when the trend was for retailers to engage in sale-and-leaseback schemes in order to generate cash for expansion plans.

However, it is becoming increasingly attractive to hold assets in order to benefit from land value appreciation, a reason cited for David Jones' reluctance to sell its flagship Sydney stores.

Gerry Harvey, the owner of the Harvey Norman chain, said that his property portfolio was crucial in generating cashflow when the retail portion of his business was struggling. Harvey owns over AUD 2 billion in franchise shops, which he leases to the operators of Harvey Norman standalone stores, earning cash from the lease, capital appreciation of freehold properties and sale of furniture.

Commonwealth Bank's Andrew McLeannan cited Woolworths as a prolific example - the chain continues to accumulate about AUD 1 billion worth of property per year.

"We estimate that without a significant divestment program, the value of property will accumulate to about AUD 7.9 billion by financial year 2016. Despite the market improvements the task is large and the asset quality remains a concern for the industry," he said.

Evidence suggests that Woolworths has underperformed competitor Coles on a comparable store-by-store basis for the past three years, with industry feedback and ex-liquor sales indicating that Woolworths is failing to hold its share of the supermarket spend despite an active store expansion programme.

"While we remain concerned of Woolworths' strategy to drive sales through a capital-expenditure-heavy store expansion strategy, the capital bottleneck that is developing could be loosened by increased demand for Woolworths property. We maintain our 'sell' recommendation... but note the risk that Woolworths is unable to divest assets is reducing," said Commonwealth Bank.

Through its 75% stake in Australian Leisure and Hospitality Group (ALH), Woolworths maintains a healthy exposure to the pub and bottle-shop sector. ALH recently entered into a joint-venture with the Laundy family worth about AUD 500 million to own and operate about 32 pubs and adjoining bottle shops across Australia. It is also connected to the ALE Property Group, from which ALH leases a selection of pubs.

Tags: Commercial real estate, Industrial properties, Shop for rent

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