ment projects deferred or scaled back. A report released this month by the property firm, CBRE indicates large format retail centres were the best performed commercial property assets in 2016 on a yield compression basis. The better investment return of the category reflects strong investor interest, including overseas investors, in a relatively small retail property asset class. The investor interest in large format retail centres is also encouraged by strengthening rent levels, the flexibility of the space and the emergence of new retail concepts and acceptance by planning authorities of a wider range of acceptable uses. Baby Bunting is a case in point, as that type of store would not have been permitted in a bulky goods complex under earlier town planning laws, which essentially only tolerate furniture and floor coverings.  Large format retail centres can now have gymnasiums, pet supplies and even supermarkets under some revised state planning schemes. While rents are rising, the large format retail centres are attractive to retailers keen to break out of more restrictive and costly shopping mall locations. Welcome home The big player in large format retail centres is now the Home Investment Corporation (HIC), which last year acquired 61 Masters Home Improvement stores and 21 development sites from Woolworths for around $800 million. The deal represented around 700,000 sqm in retail floorspace around Australia. The Home Investment Corporation is a consortium of families associated with the Aurrum Group, Spotlight Group and Chemist Warehouse. Zac Fried, who chairs the Large Format Retail Association, has a better understanding than most of the trends in the retail industry and the opportunities for category killer or big box formats.  In a clear indication of the changing character of the large format retail complexes, the prospective tenancy list for the revamped Masters stores includes Spotlight, Anaconda, Chemist Warehouse, JB Hi-Fi, The Good Guys, Super Amart, BBQs Galore, Boating Camping Fishing, Super Cheap Auto and Amart Sports, as well as Woolworths Supermarkets, Dan Murphy’s and Bunnings. David Di Pilla, HIC chairman, said last year the group’s plan had received “substantial support and interest” from retailers and the first of the converted Masters Home Improvement store sites will open early this year. “Our concept and plans for the centres have been actively tested and developed with very successful retailers who recognise its potential, especially the opportunity to gain exposure to population growth regions across Australia,” Di Pilla said when the deal with Woolworths was finalised. HIC outbid a number of pureplay property investment firms in the deal for the Masters Home Improvement sites, possibly reflecting the value the consortium placed on strategic retail locations that already held hard won planning approvals. The Shopping Council of Australia has consistently criticised the widening of acceptable uses for large format retail centres, which have been encouraging traditional mall retailers to develop category killer formats that compete with their retail offer. With estimated annual sales of around $66 billion, the large format retail centres have skimmed growth from shopping malls and have been one of the challenges in tenancy mix planning. While the shopping centre industry remains bullish about the outlook for tenancy recruitment and income growth, it is not all plain sailing for landlords. A string of retail chain failures have forced a rethink on tenancy mix and impacted on rent negotiations with sub-regional and neighbourhood centres facing the bigger immediate challenges. For some centres, those challenges could be more serious in the future if Wesfarmers and or Woolworths start closing underperforming Target and Big W stores. Wesfarmers has this month reported a 17.7 percent fall in sales for Target to $1.62 billion and a 78 per cent plunge in net earnings to just $16 million. Around $13 million of the lost profits were attributed to transition costs in the business, but Target’s sales and earnings have now been in retreat for several years and the return on capital for the latest half fell 16 per cent, while stablemate Kmart on capital productivity was up 41.5 per cent. Big W is also struggling and store closures for both chains look to be inevitable, leaving a large dark hole in some centres, unless another large footprint retailer such as a supermarket can be recruited to the space. To this point, larger retail shopping centres have been able to absorb the failures of some chains and, in some cases, exits or cancelled commitments by Myer and resizing by tenants keen to reduce occupancy costs.  However, waiting lists for retail space no longer run as long as they did previously and replacement tenants are increasingly only signed up on rental deals that are lower or include other concessions that were not extended to failed chains.  The need to try to retain struggling chains rather than chance recruiting replacements may become a higher priority with landlords, with Howards Storage World indicating it has negotiated more favourable deals for some of its franchisees.  Howards Storage went into administration in December and exited a swag of company-owned outlets before it was sold to new owners based in the United Emirates.  Larger centres have been confident that the surge in international retailers will take up space vacated by local chains, but most of the new foreign entrants are looking to open in strategic locations rather than to establish large store networks.  The international retailers are also pressing for favourable rental deals that, in turn, are putting more steel into local chains negotiating on rent renewals. Japanese retailer aims to disrupt local market One exception to the limited store network strategy of most of the foreign retail entrants could be the Miniso chain of fashion, cosmetics, accessories and homewares stores. The Japanese chain already has three stores in Sydney at Chatswood, Hurstville and Bondi Junction and is now scouting for another seven stores in New South Wales and 10 sites in Melbourne. Miniso is reportedly keen to ultimately open up to 300 stores throughout Australia in a range of locations from high streets to shopping malls, a very ambitious target for a single retail brand. In its half year report to December 2016, the listed Vicinity Centres noted that it had had 138 stores across 16 chains go into administration, representing about 1 percent of retail floorspace. Vicinity Centres report to the Australian Stock Exchange said 88 stores had been handed back across the company’s shopping centre portfolio but 80 percent of the sites had been re-leased. Vicinity Centres noted that specialty store occupancy costs had eased slightly in the first half of the 2017 financial year. The company also noted that tenancy mix changes across the portfolio had seen a 20 per cent increase in space allocated for cafes, food courts and restaurants and a 32 per cet lift in space leased for retail services. Retail floorspace allocated for women’s apparel fell by 12 per cent. As with Vicinity Centres, GPT, another listed retail landlord has seen a significant boot to the value of its shopping centre portfolio. GPT has also been reworking its tenancy mix and women’s apparel has also been under the microscope as sales lag other categories. Around 32 per cent of new tenants recruited to GPT shopping centres are food operators with a similar percentage in retail services. GPT noted in its report to the Australian Stock Exchange on the first half to December 2016 that occupancy costs in centres had declined in the period and, while specialty sales growth had been subdued, sales productivity had improved as a result of tenancy re-sizing and tenant replacement. Access exclusive analysis, locked news and reports with Inside Retail Weekly. Subscribe today and get our premium print publication delivered to your door every week.