Super funds looking to offload their retail property assets amid a downturn in consumer spending could be forgoing strong investment returns.

Mercer’s head of real estate Paddy Brown, said while allocations had already fallen around 10 per cent over the last three years, some investors were still looking to sell legacy retail assets despite “distressed pricing” in the sector.  He warned that those funds “blindly” chasing office and industrial assets were at risk of overpaying.

“Investing top down is very dangerous at this point in the cycle,” said Brown, ahead of Investment Magazine’s real estate conference in Melbourne later this month. “I would be concerned about investors purely focused on thematics and selling good assets into a relatively illiquid market.”

Retail has come under pressure from weak consumer spending and increased competition from online retailers. Just last month, clothing retailer Jeanswest announced plans to close a quarter of its stores after going into voluntary administration. Brown said cyclical and structural headwinds made the sector a “hard sell” to investment committees which were too focused on the headline noise.

According to the MSCI/Mercer Wholesale Property Fund Index, which looks at institutional ownership of Australian real estate, offices made up on average about 48 per cent of a property portfolio versus 41 per cent for retail and 11 per cent for industrial. Allocation to the office sector is up about 6 percent over the last three years as prices climbed.

Brown said capitalisation rates for retail assets were 100 to 150 basis points above those of office and industrial which gave investors a “pretty strong income” over the other sectors. The cap rate is the ratio between net operating income and the asset value.

“There is money to be made in retail,” he said. “There is an opportunity for selective assets for those who have the ability to really analyse the sector from the bottom up. There is not a lot of competition for those assets, whereas in the industrial space there is huge competition so there is risk of overpaying.”

Willis Towers Watson’s head of real assets Dania Zinurova, said institutional appetite for real estate is generally waning. Whereas five years ago it was nearly impossible to invest with certain institutional property funds due to strong appetite from local investors, those same funds today were managing redemption queues and looking to raise capital outside of Australia, particularly in the retail sector.

Zinurova, who is due to speak on portfolio construction at the real estate conference, said while the office sector were still “holding up,” investors had started to become more cautious amid strong supply and weak economic growth in Australia.

“There are some questions over the longer term about whether is it still realistic to expect the same strong returns in the office sector going forward,” she said in a telephone interview. “I would say it’s unreasonable. Returns are waning a little bit across all sectors, with retail suffering the most.”

Like Brown, Zinurova said the key to real estate investment was being selective.

“The time is over when investors just allocate capital to real estate and get great returns,” she said. “Investors need to have a very clear idea about what they are looking to achieve: Is it alpha, income return or pure diversification?”

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