Investing in Large Format Retail
Large format centres, also known as bulky goods shopping centres offer an alternative to traditional shopping centres. In this guide we dive into the fundumentals of investing in large format retail.
The Large Format Retail (LFR) property sector is a substantial component of the retail property sector and accounts for approximately 30% of total occupied retail floor space in Australia. There are currently 162 LFR centres in Australia with a total asset value in excess of $6bn.
LFR centres are traditionally retail properties where a number of retailers have showrooms for the sale of a range of furnishings, electrical, bedding, hardware and other household items. The centres were commonly referred to as ‘bulky goods’ or ‘homemaker’ centres to reflect their more traditional tenant types. LFR centre retailers often sell items of a bulky nature that require a large area for handling, display or storage. However, the sector has evolved to a broader offering and can include fitness centres, baby supplies, pet supplies, auto supplies, office supplies, leisure and sports equipment, medical services, big box pharmacies, supermarkets, cafes and restaurants.
Demand for LFR is broadly impacted by the strength of the retail sector.
Historically, the Household Goods category has been the retail sector with the greatest impact on demand for LFR.
Within the Household Goods category, Hardware has been a consistent performer thanks to renovations and the strength of Bunnings. Electronics have been sensitive to changes in the Australian Dollar, while Furniture has more closely followed the strength of the housing market.
Historically, Furniture and Electronics retail sales have demonstrated a stronger correlation (78% and 80% respectively) than Hardware (41%) to the broader Household Goods category.
Changing Face of LFR
The last 10 years have seen major changes in how LFR centres operate, so much so that they are no longer called Bulky Goods Centres.
Historically, Bulky Goods were smaller, privately owned, and mostly exposed to private furniture and other household goods retailers. Today LFR centres are larger, are increasingly owned by institutions, have a more diversified exposure to retail, with a greater exposure to national and ASX listed retailers.
In addition many of these retailers now have a multi brand strategy, such as Super Retail Group, compared to the historical single brand strategy family business.
One of the major changes for centres has been the influx of non-traditional tenants. In recent years Australia has followed the US trend of incorporating a wider range of retail categories into LFR centres such as:
- Automotive – Super Cheap Auto, Auto Barn, Repco, Ultra Tune.
- Sporting & Fitness – Amart Sports, Rebel, Golf Mart Superstore, Anytime Fitness, 99 Bikes.
- Personal Goods – Toys R Us, Baby Bunting, Spotlight, Lincraft.
- Supermarket – Aldi and Liquor.
- Pets – Pet Barn, PETstock.
Favourable regulatory changes, such as changes to zoning and planning policies, have supported these changes. In some states these have allowed for smaller shops (below 500sqm) and in 2013 Victorian planning made allowances for the inclusion of supermarkets in LFR centres (below 1,800 sqm).
These combined effects means that non-household good type retailers now comprise about 37% of LFR centres. Some industry sources see this trend continuing with greater exposure to such retailers like food and beverage, and entertainment, as is the case in the US and Europe.
This greater diversity of retailers will ultimately mean the performance of LFR centres will be less correlated to any with one particular business cycle, such as housing. In addition these changes are likely to improve the performance of LFR centres with more weekday foot traffic and longer linger times by customers.
For more information see the Large Retail Format Association.
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For more information on commercial property in general, read our article Investing in Commercial Property – The Ultimate Guide.