This exclusive CEO Outlook contribution by Sam Curry, Head of Portfolio Retail at ISPT is featured in the latest edition of SCN magazine.
When I reflect over the past 12 months across the retail market, I am often drawn to the word ‘stability’. Stability in sales, stability in occupancy, stability in rental growth and stability in customer visitation. In what was expected to be a year of some uncertainty across the retail market as the economy stalled and consumer spend was predicted to dry up, we saw positive performance across most key metrics in our portfolio of more than 70 retail assets.
Early commentary in 2024 around a possibility of increased retail closures through the year proved incorrect as most retailers managed to work through and improve operational efficiencies and focus on core customer needs. We did, however, see mainly independent operators succumb to increased operating costs and have to close stores while most national branded retailers, having well-established balance sheets, were able to push through any financial issues. Mosaic Group was the exception, having moved into administration in 2024. This was perhaps the only real significant closure event through the year.
Capital flows into retail also improved through 2024 with transactions up 35% from the prior year. 2024 was a year of recovery for the market with privates and syndicators the most active on the buy side. This likely signals at or near the bottom of the market with improvement expected into 2025. Institutions and listed groups were the most active on the sell side through 2024, accounting for about 70+% of all transactions. A need to pay down debt, re-weight portfolios and recycle capital into more accretive activities were the key reasons for the heavy divestments. As the bond market softens, this may create opportunity for these investors to revisit the retail market and become more a net buyer than net seller across the coming 12-18 months.
Into 2025
Coming off a sound base in 2024, we see further improvement into 2025. We expect sales to grow from +2.2% MAT for the CY2024 to about +3.5% for CY2025 off the back of interest rate cuts flowing through from mid-2025. Leasing spreads are expected to remain in positive territory. As rents were re-based pre and through COVID, growth started to filter through from mid-2023 at about 1-2% p.a. and is now sitting at about 4-6% p.a. This should start to positively impact valuation metrics.
As the macro economy is expected to improve through 2025 and sales grow, we expect retailers to be more active with store expansions over the coming years. This should improve occupancy rates across our portfolio and start to shift them close to 98% occupied with some better located assets at near 100%.
With a limited supply of new retail assets on the horizon, existing centres should benefit from the increased population growth forecasts at about 1.5% p.a. over the next seven years. This may assist with increased competition for capital for retail assets given the certainty of cash flow and strong yields currently on offer.
We still believe the non-discretionary retail centres are well-placed to capture improved trading conditions into 2025 as consumers continue to shop more locally and utilise these centres as regular meetings places. As these smaller assets also continue to diversify their offers and income streams to include services such as medical and allied health, we expect the appetite for capital into this asset class will grow further.
A new era for ISPT
For ISPT, 2025 will begin a new phase of its business journey. Having completed a merger at the end of 2024 with IFM, a $220 billion global institutional investment manager, owned by industry super funds, it will be an exciting next 12-24 months for the business. Partnering with a like-minded and purpose driven business, being able to share and utilise a much-expanded business network, should only improve how we operate and run our assets, and increase our capital and investment opportunities across the property market.
Our sustainability credentials are global leading
2024 capped off another milestone year for ISPT on the sustainability front. Our continued focus and investment into this space is helping drive improved operational efficiency, creating better futures and very much aligning with our investors’ growing appetite to genuinely impact and improve our environment. Key highlights for the business were:
- Securing 100% renewable electricity across the portfolio through the establishment of new power purchasing agreements.
- Partnering with CSIRO as the first property company to participate in the Nature IQ Early Adopter Program to assess our interactions with nature.
- Expanding our social impact activities to provide support valued at $6.7 million in FY2024.
- Launching our Innovate Reconciliation Action Plan, furthering our commitment to our reconciliation journey.
- Achieving the first Gold Cleaning Accountability Framework Portfolio Rating for our main fund.
- Establishment of a new $1.5 billion Syndicated Sustainable Linked Loan (SLL), bringing ISPT’s SLL to $5.75 billion, one of the largest for any real estate manager.
The continued success of our convenience-based fund
Our neighbourhood-based shopping centre fund (IRAPT) which was born from a seed partnership with Coles has continued to outperform the index while at the same time growing in the number of assets and value. Now at over 50 centres with a fund value of $2.7 billion, the fund acquired six new retail assets in 2024, taking advantage of good buying in the market and the stable cash flows achieved from these neighbourhood-based assets.
Over a 10-year period, the fund has delivered an 8.10% total return compared to the retail index of 2.85%. We see further opportunity to place more capital into this retail space through 2025 and are well supported by our investors to grow the fund further. We anticipate the next 12-18 months will be very active for IRAPT.
Future developments
While the construction market remains challenged, the retail portfolio has some exciting project opportunities over the coming few years to explore.
We are looking to deploy significant capital across eight assets, to enhance our existing offer, update our amenity and provide our customers with an elevated experience. We are excited to be able to present these to the market in due course.
As we work on these developments, we have also been actively recycling capital through the portfolio. In 2024, we divested six retail assets at about $415 million some of which was utilised to acquire additional retail assets to continue to reset the portfolio. We will continue with actively reshaping the portfolio to deliver enhanced returns to our investors.
As a property business, and within our retail team, we are excited for what 2025 holds for the retail market and our relationships with our retail partners. As an industry we have collectively faced some challenging years and we look forward to building on the stable market conditions that we started to experience in 2024. We see many opportunities and believe it is a great time to be working in the retail property sector.
SCN’s Premium members can view the full CEO Outlook feature in the latest edition of SCN magazine.
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