Remote Kmart site tests investors’ nerve

A site leased to quite possibly Australia’s most remote Kmart is offering investors a rare 9% yield — but is the return worth the risk in a town grappling with crime and social crisis?

In the heart of Central Australia, a blue-chip retail asset is offering investors something rare: a near-9% yield backed by one of the country’s most trusted brands.

Kmart and tyre specialist Mycar jointly anchor the property at 56 Bath Street & 73 Railway Terrace, Alice Springs, which is being sold via expressions of interest with a guide of $21m-$22m.

Kmart, a Wesfarmers subsidiary, holds a 12-year lease to 2032 with options to 2062, and covers its own outgoings. Mycar, owned by Continental AG, is locked in until 2030. The 12,310sqm site sits in the town’s main retail strip alongside Coles, Woolworths, McDonald’s and KFC — serving communities spread across hundreds of kilometres.

Despite being on the market for months, agent Flynn McFall at CBRE says the listing has drawn strong interest from both high-net-worth individuals and institutional buyers.

“They’re looking for a blue-chip covenant with a high yield, which is probably around 8.5% to 9%.”

Kmart’s turnover at the site has grown steadily, with annual net income sitting at $1.85 million plus GST.

“Investment fundamentals are there regardless of where it is,” Mr McFall said. “Any investors looking at Central Australia are open to opportunities as long as the covenant strength is there with the added benefit of a strong return in terms of cash flow.”

The Kmart has a lease out to 2032 with options, while MyCar is locked in until 2030. Picture: realcommercial.com.au

Large format retail a big winner?

Large format retail nationally has returned 12.8% annually over the past decade, with vacancy at just 2.8%, according to CBRE data published in June, with CBRE expecting momentum to continue. JLL points to a near-collapse in new construction squeezing existing centres into scarce, highly sought-after assets.

But the picture isn’t all rosy. Real Commercial senior economist Anne Flaherty warns the sector faces “challenging times” as a weak housing market curbs big-ticket spending on furniture and whitegoods.

“We have a significant property downturn — fewer homes selling, fewer people buying, less movement overall. Even in the rental market, people are staying put longer because there’s less choice out there. Turnover has been pretty subdued, and that’s likely to stay a headwind for some time.”

Kmart, she says, is more insulated than most.

Experts say Kmart is more insulated than most big box retailers when it comes to the cost of living crisis and consumers pulling back discretionary spending. Picture: realcommercial.com.au

“It’s a pretty resilient, well-known brand that people shop in for all kinds of different reasons”, she said, while Alice Springs’ slowly growing, above-average-income population helps the retailer’s case.

Mr McFall adds regional property can offer investor benefits, trading lower capital growth for higher cash flow.

“In the regions, you generally get higher cash flow because land values are lower and there’s less capital growth to bank on. In the city, land values are higher, so investors accept a lower cash flow because they’re compensated by stronger capital appreciation,” he said.

Red centre security concerns

But there’s a headwind that no amount of yield modelling can fully smooth over: Alice Springs’ recent social crises, including elevated property and alcohol-related crime, housing shortages and infrastructure strain in town camps.

Ms Flaherty says this will “absolutely” weigh on sentiment and values.

Crime and unrest in Alice Spring, experts say, weighs on sentiment, but the fundamentals of its retail outlook are still strong. Picture: Getty

“There’s no doubt the value of assets in Alice Springs have taken a hit because of local crime. The risk of products being stolen and property being damaged is much higher in Alice Springs compared to elsewhere in the country.”

Yet that same risk may be what makes the asset compelling, she says.

“The price of a comparable asset in a capital city is going to be much higher. But it’s still a very high-quality tenant — so if the tenant is partnering in providing security for the asset, the return could still be quite good. For income-seeking investors, there could be real benefits.”