Neighbourhood mall deal activity to pick up as cap rates rise to 6pc
Collingwood Park Shopping Centre sold for $18 million. Photo:

Neighbourhood mall deal activity to pick up as cap rates rise to 6pc

Australia’s fast-rising population and softer capitalisation rates will fuel demand for neighbourhood malls this year, analysts said, with private investors chasing assets riding on non-discretionary spend settling three sales worth $45 million in the weeks leading to Christmas alone.

The three South East Queensland neighbourhood malls that settled late last year – Mount Warren Park Shopping Centre, Collingwood Park Shopping Centre and Spring Marketplace – were anchored by supermarkets Coles, Woolworths and IGA, respectively.

Collingwood Park Shopping Centre sold for $18 million.
Collingwood Park Shopping Centre sold for $18 million.

“The presence of a supermarket as an anchor tenant has become increasingly attractive to investors still looking to deploy capital into the retail sector,” MSCI’s Pacific head of real assets research, Ben Martin-Henry said.

“Surging population growth is only likely to increase the desirability of these local centres as well.”

According to MSCI data, 39 of 65 shopping centre transactions in 2023 were for neighbourhood malls. This was fewer than the 59 that exchanged hands in 2022 – when rising interest rates were changing commercial property valuations – but still accounted for 60 per cent of all retail centre deals.

In dollar terms they were a smaller component, totalling $982 million-worth of sales, or 19 per cent of all shopping centre deals.

Cap rates soften to 6pc

Unpacking the South East Queensland deals, Mount Warren Park Shopping Centre sold for $18 million, while Collingwood Park Shopping Centre exchanged hands for $15.3 million. Both assets were owned by listed convenience-based mall operator Region Group, which owns $4.2 billion worth of these properties.

The two deals represented an implied average capitalisation rate – an estimate of yield – of 5.5 per cent, according to Region.

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The two Region sales affirmed that vendors and buyers were starting to find common ground in the second half of 2023 regarding how much neighbourhood malls were worth on cap rates of about 5.5 per cent, Mr Martin-Henry said.

That pickup in demand for neighbourhood malls among private investors was only expected to gain pace in 2024 as Region’s weighted average cap rates softened another 18 basis points to 6.04 per cent in December to reflect lower valuations, he said. The increase in capitalisation rates resulted in Region’s like-for-like portfolio valuation declining by 2 per cent in the six months to December.

“For those buyers who were looking for higher discounts and opted to not buy last year, this may be a good time to buy as the market has more certainty on prices,” Mr Martin-Henry said.

Last year, Region chief executive Anthony Mellowes said he would only buy neighbourhood malls on deals that reflected at least a 6 per cent yield.

“Evan [Walsh, Region Group’s chief financial officer] won’t let me buy anything below a 6 per cent yield because it costs that much just to fund it,” Mr Mellowes said at the time.

Spring Marketplace, which was owned by a private investor, sold at a 5.41 per cent yield of $10.85 million.

All three assets were sold to “one-off private investors” who viewed neighbourhood malls favourably due to the weak pipeline for new malls, said JLL’s Jacob Swan, who brokered the sales with his colleague Ned McKendry.

“A major investment attraction of the retail sector is the direct correlation between the undersupply of new neighbourhood centres and the population growth driving the performance of established centres,” Mr Swan said. “Based on pipeline and projects currently under construction, 2024 will see the lowest level of supply since 2011.”