In 1957, Australia’s first shopping centre opened at Chermside in Brisbane. Featuring 24 speciality stores and a department store, a local newspaper described it as “an island of retailing in a sea of car parking”1. Now home to over 400 retailers with a footprint the size of 21 soccer pitches, Chermside redefined what shopping was all about.
Large format retailing (LFR) is once again changing the face of retailing. Sometimes known as bulky goods or big box retailing, LFR began as a way for shoppers to access a better deal on whitegoods, furniture and floor coverings. In time retailers such as Nick Scali, Freedom, IKEA and JB Hi-Fi established large showrooms in cheaper premises, also allowing them to offer lower prices (or make higher margins). The LFR sector now accounts for almost a quarter of total retail sales.
With modern LFR centres now including baby supplies, sporting equipment and international grocers alongside the traditional household goods, broadening their appeal to retail consumers, APN is an avid investor in the sector through our holding in Aventus Retail Property Group.
For investors looking to commercial property for relatively high, income-focused returns with lower risk, LFR is a compelling proposition. The attractive income is a result of six market features identified by APN.
1. Growing sales channel – More prominent retail brands are embracing LFR as a sales channel. Where once there was just a major bedding, electrical and homewares retailer at a ‘homemaker’ centre, LFR now offers more brands from more categories, from fitness centres and medical services to office, auto, pet and baby supplies. This explains how in the year to 30 June 2017, approximately 22% of total national retail sales took place in LFR centres, equating to almost $70 billion2.
2. Property market a growth driver – Renovation activity and a record number of building approvals are driving LFR sales. Retailers are benefitting from our love of home improvements and furniture upgrades.
3. High market fragmentation an opportunity – Two large LFR investors – Harvey Norman and Aventus – account for about 30% of the national LFR market. The remainder is held either by single asset owners or smaller portfolios. For Aventus, the possibility of market consolidation is a growth opportunity.
4. Offshore tenant demand – Offshore retailers such as Ikea, Costco and Aldi have selected LFR for a substantial portion of their Australian roll-outs. Sports retailer Decathlon and European grocery chain Kaufland are following in their footsteps. This trend is likely to underpin demand for LFR assets.
5. Resilience to online retail – Consumers like to touch and feel LFR goods, which makes them more likely to purchase in-store. In addition, such goods usually entail substantial delivery costs for the customer due to their size. Most products are subject to the “two-man” rule, which increases delivery costs. Both imply that the growth in online retailing is less likely to affect the LFR sector than more traditional retail.
6. The barbell is becoming a tripod – In retail, the middle has become a bad place to be. Better to either service the non-discretionary spend at dominant fortress malls like Chadstone and Bondi Junction, or provide convenience in groceries and other staples at the local Neighbourhood Centre. This bifurcation is known as the ‘barbell-effect’. The growth in LFR retailing and the improved mix it offers adds another leg to this framework by presenting a compelling offer for consumers and an efficient sales channel for LFR retailers.
For these reasons, APN took a position in ASX-listed Aventus Retail Property Fund (AVN) at IPO in late 2015. Aventus owns a portfolio of 20 LFR assets valued at about $1.80bn and home to some 557 retail tenants. It’s asset base is concentrated to metropolitan Sydney with a strong presence in other markets along the country’s eastern seaboard.