Real estate leased to big box brands is among the most-sought-after in New Zealand, says Ryan Johnson, Bayleys' newly-appointed national director commercial.
Globally, big box retail is in a state of flux, as consumers shift to digital shopping platforms and smaller-format stores, Johnson says. But, in New Zealand, big box retail property is still viewed as a solid investment.
Johnson says in the US, investors are pulling back from large-format retail property, as rental revenues decline, capital growth stagnates and long-term leases fall out of favour. However, in New Zealand, big box retail experience is still in demand.
"Kiwis have long seen the value in shopping for mid-range, low priced goods all under one roof. And big box retailers have reaped the rewards, with Mitre 10, Bunnings and Kmart consistently recording strong profit growth.
Johnson says the big players in big box retail continue to be home improvement outlets, like Mitre 10 and Bunnings, and discount department chains, such as Kmart and The Warehouse.
"Mitre 10 or Bunnings listings tend to attract investors who might not otherwise buy commercial property, and are seen as secure, long-term passive investments — an opportunity to buy a high-quality retail property backed by a strong covenant," he says.
Last November, an investment group paid $180m for four properties leased to Bunnings Warehouse in New Zealand and Australia.
The New Zealand property is occupied by Bunnings New Lynn, while the Australian properties are still in the development phase. All were sold back to Bunnings with 12-year leases, with options potentially seeing the lease terms reach 60 years. The stores' combined areas span 54,000sq m, while the blended yield of the properties was in the low-five per cent range.
The sale followed the purchase of the land and buildings occupied by Bunnings Warehouse in Grey Lynn for $37m and Bunnings' renewal of the 12-year leases on its sites in Rotorua, Hamilton and Palmerston North, which Stride Property Group sold for $79.5m to investment vehicle Investore, which was established to invest in substantial property assets.
Johnson says big box retailers have been able to offer big discounts, using well-honed supply chain and analytics capabilities to offer high-demand products at low margins — with the immediacy and interactivity that e-commerce players cannot.
Unlike mass merchants, which provide basic goods at everyday low prices, big box retailers can leverage the novelty of their constantly changing products and discounts. They offer the "thrill of the hunt" for shoppers who enjoy discovering trending products at prices well below market.
But even considering the unique retail and cultural environment that has left big box retail in New Zealand largely immune to the pressures felt by the sector globally, big box retailers still need to prepare for change if they wish to avoid becoming "ghost-boxes", Johnson says.
"Forward-thinking big box retail chains are becoming more than just places that stock and sell goods. They are staging immersive, memorable, share-worthy experiences.
"For example, in the US, outdoor sporting and camping goods chain Bass Pro Shops has populated its locations with wildlife displays, archery ranges and huge aquariums so customers can try out its products and sample the lifestyle it promotes.
"Closer to home, Kmart recently changed the format and layout of its Australian stores — positioning the payment hubs in the centre of the stores. This simple move not only disrupted the age-old tradition of paying on the way out, it provided customers with extra incentives to pick up ancillary items before exiting the store."
Retail NZ group manager of public affairs Greg Harford says large-format retail will remain an important part of the NZ retail landscape for years to come.
"But strong competition from online shopping platforms will put pressure on operators to refresh their offerings and improve their customer experience".
"Convenience is king. Customers want great products, great prices and an in-store experience that is both hassle-free and enjoyable. Getting these factors right will drive success in 2018," he says.
First Retail Group managing director Chris Wilkinson agrees saying: "The strong and successful big box centres will continue to prosper. The weaker centres that are struggling now may have other, better futures.
"Tenants should be encouraged to make small but visible changes on a more regular basis. This should focus on frontages, signage and the first few metres inside the lease-line.
"Many of the big brands are now deploying these strategies which are working well in maintaining consumer engagement and supporting sales conversion," Wilkinson says.
Big box retail parks, he says, have started to add "daily ritual" businesses, such as cafes, takeaways and gyms, to stay fresh and relevant.
"There are also opportunities for health and wellness. Brands such as Chemist Warehouse are likely to be key contenders for space in destination centres in the future," he says.
Johnson says that under-pressure large-format retailers could find more success shifting to smaller stores with a more curated offering.
"This could create additional demand for smaller commercial spaces in areas with strong transport links and large populations, allowing owners of big box retail sites to refresh their tenant mix or even look at repurposing their properties," he says.
"With demand expected to grow for last-mile logistics spaces to fulfil online deliveries, using redundant space as distribution hubs or dark kitchens could be a valuable alternative.
"Re-purposing retail sites as office space could also be an option. The fact that retail parks are typically well connected, and offer retail and leisure amenities on site, could make them desirable."