‘Fortress’ Retail Draws Investors Back to Shopping Centres

Construction costs are settling and developers are finding new pathways into feasibility, a Sydney forum has been told. Speakers at The Urban Developer Sydney Developer Outlook, held on February 26, were optimistic about finding ways around the ongoing difficulties in labour, materials and productivity. TOGA development director Jessica Kelley said that her team was hopeful about the potential of artificial intelligence in the construction industry “like everybody else is, but also wanting to see those productivity increases happening even sooner”. “We think we’re sort of in quite a sort of normalised, stabilised position with construction costs, but obviously it’s a brand new baseline, and that is challenging,” Kelley said. Haben managing director Ben Finger agreed, saying that his team was investing in AI. “We’re spending a lot of time trying to work out where we get the efficiencies,” Finger said. P&amp;N Sleiman Group managing director Pierre Sleiman said construction costs were manageable, even without a builder-developer model, if the relationships were right. ▲ Speakers were optimistic about methods of managing or working around construction costs in Sydney. “We have gone down the path for development only. We contract out to builders,” Sleiman said. Builds can be comfortable “if you find good groups—subcontractors and a builder—and you can put together a good team and lock them in… [but] time is of the essence.” And the general outlook for residential development is positive, in the wake of regulatory changes. “I think there’s things that can be done, but the government’s doing what it can. You’ve got to hand it to them: what they did last year with all the new regulations they’ve already put in, they’re doing their best to expedite and make approvals much quicker,” Sleiman said. Retail roadblocks boon for investors Speakers agreed that retail was an increasingly important element of the Sydney market, albeit a difficult one to get right. Finger said that the outlook for retail owners and operators was strong, even if developers would struggle to bring new projects to fruition. “Skyrocketing is a stretch there, but ... we’re bullish, absolutely,” Finger said. “It’s no different to what industrial was like 20 years ago, where it was flat for a really long period of time, and then went ‘kaboom’. “We don’t expect that to happen in retail, but we’re looking at 4 or 5 per cent growth year-on-year, if we’re forecasting out the next three-year period.” While investors had been cautious about retail as online shopping boomed, the sector has begun to shine again in recent years. “Institutional capital coming back into the sector is a new thing,” Finger said. “You had a big flight away from retail in 2017-18, what we call the Amazon effect, where all capital was nervous that there’d never be a shopping centre again, because everyone’s going to shop online. ▲ Finger said Haben’s $900-million acquisition of Westpoint, in conjunction with Hines, in 2024 marked the return of institutional capital to Sydney retail. “That’s when groups like ourselves stepped into the market quite aggressively. So we were doing the buying with high net worth capital offices.” Institutional investors are now once again active in shopping malls—and Australia is an attractive destination for international capital seeking retail assets. The US market, by comparison, has three times the per–capita retail floor space, Finger said. “No doubt there’s a per capita recession, we’ve all seen it. We’ve all felt it in our various industries. But retail has probably been in that sweet spot, and it’s in that sweet spot because no one is developing new shopping centres,” he said. “We’ve got very, very tough planning restrictions legislation in Australia. It makes it very hard to get even a simple supermarket approved. So it’s very much a protected asset class, almost fortress-style.” Finger said that attempting to build a new shopping mall under current conditions would cost 30 per cent more than rents would yield, and that it hadn’t been done successfully in about two decades. “But you’ve had that driving population growth, and with that driving population growth, even if you have a per capita recession, you’ve got more people feeding into the same shopping centres. “Which is primarily one of the strong reasons why you’re seeing the big flight back to retail investment.” Strategic deployment of retail unlocking yield “Part of the appeal for us in the sector is that all of these sites have mixed zoning. It’s one of the only asset classes, in fact, the only asset class in Australia,” Finger said. “Meaning you can do everything on it, effectively. Residential, office, even in some cases industrial or medical centres. “When we buy these sites the way we think about them, we buy them for the cash flow. We buy them for the ability to be able to grow that cash flow and grow the value of the asset. But of course, it’s what else we can do on that site. Finger said that his team has about 1000 homes approved on their mixed-use assets, with a potential development yield of up to 4000 homes. Sleiman said that alternative approaches to projects, which used retail as an anchoring component and combined with other uses, could help projects stack up. ▲ P&amp;N Sleiman’s Victoria Place project ( also pictured at top ) will incorporate a private hospital as well as retail and residential. “Retail is difficult at the moment, the big centres are taking away from all the little centres,” Sleiman said. “So we found ourselves going to the medical side, and we recently had a project where we had a 10,000sq m shopping mall. And we decided to go get a deal done, building a private hospital—one of the only private hospitals getting done in New South Wales at the moment,” Sleiman said. Kelley said that TOGA was focusing on build-to-sell, rather than retail, as the core of its sector strategy. “In relation to other sectors: our focus, and you can take from this what you will, is in the build-to-sell market at the moment, and focusing acquisition and planning towards that. And as I mentioned, the mixed-use component of that has always been really important,” Kelley said. Site selection a core factor for mixed-use “We continue to look at Sydney and the Sydney fringe, where we’ve always operated, for selective sites. Our position is long-term, partnering with capital and with landowners to continue to unlock those opportunities," Kelley said. “So we do see that they’re out there, but definitely our mindset is in mixed-use and in build-to-sell.” ▲ TOGA’s Surry Hills Village precinct combines retail and residential with a hotel, and commercial and public spaces. While there are plenty of hurdles to putting a mixed-use project together, working hard to acquire the right site will help ease the pathway, Kelley said. “Where we’re not interested at the moment is acquisition of sites that are unzoned, that don’t have mid-term planning pathways.” Sleiman told the event that foresight and patience could bear rewards when it came to acquisitions. One P&amp;N Sleiman Group project required purchasing 100 individual strata lots. “So, we literally bought 100 individual units off 100 people. It took 22 years ... and that’s probably why I’ve got gray hair,” Sleiman said. “But the reality was, it was positioned for future planning. I had an understanding that planning was changing, FSR and heights were coming up, population growth was coming.”

‘Fortress’ Retail Draws Investors Back to Shopping Centres

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