The appeal of investing in a Bunnings Warehouse

A long-time favourite of both consumers and commercial property investors, Bunnings Warehouses are now even more highly prized as a pandemic-proof asset.

Private investors, funds, syndicates and institutions are all targeting properties leased to the hardware and home improvement retailer, although there are limited opportunities to buy the trophy assets.

But for the average Australian, owning a Bunnings site - worth tens of millions of dollars - is out of reach.

Instead, investors can get a slice of the iconic brand through the share market.

^{Bunnings sites typically sell for tens of millions of dollars. Picture: AP}

ASX-listed BWP Trust (BWP), one of the largest owners of Bunnings sites in Australia with 65 stores, earns 85% of its rental income from the one home improvement retailer: Wesfarmers-owned (WES) Bunnings.

But Morningstar senior equity analyst Adrian Atkins says BWP is a very solid business with low gearing and a strong key tenant in wide-moat-rated Wesfarmers, a well-established top 10 ASX-listed company with a narrow moat.

"Concentration risk from having Bunnings as its primary tenant is not a concern given the benefits from having a strong and growing tenant," he says.

Why commercial property investors like Bunnings

Bunnings has been one of the most sought-after commercial real estate investments during the Covid pandemic, as private and institutional capital targeted non-discretionary retailers, blue-chip covenants and defensive assets with secure income streams.

Bunnings has benefitted from the pandemic-driven spending boom on new homes, renovations and DIY projects. As Atkins notes, home improvement retailing is typically resilient to the business cycle.

Burgess Rawson partner Yosh Mendis says Bunnings is one of the most popular asset classes in the Australian and New Zealand markets, appealing to a range of investors including high-net-worth individuals.

"There's a lot of private families out there that have been successful in business and have ended up with a lot of land or a lot of wealth, and they're looking for reliable income streams that are steady and not complicated," he says.

"Bunnings freehold investments definitely tick that box and that's one of the reasons they're so popular. In terms of their leases, they're pretty straightforward: long term, they pay most of the outgoings, and the rent review structures are easy to understand."

^{Bunnings was a big winner in the Covid-driven renovation boom. Picture: AP}

Burgess Rawson partner Billy Holderhead says an identifiable and trusted brand like Bunnings also appeals to investors.

"People love the Bunnings brand. People love the Bunnings business. It's very relatable," he says.

"If a private investor is weighing up spending $30 million or $40 million on a supermarket, a shopping centre or a freestanding Bunnings, I think investors lean towards Bunnings when they are the only tenant on site, they're large in scale, they're really well located and everyone has an affinity with the business."

Holderhead attributes the investment appeal to the simplicity of the property set-up, the size of the high-profile sites and the high-quality tenant that's part of Australians' day-to-day life.

"The model works for Bunnings as a business but clearly it works for property investors just as well."

The sites can also be successfully repurposed if Bunnings ever moves on, he adds.

Competition for limited Bunnings opportunities

Bunnings assets have attracted competitive bidding during the pandemic, although supply has been limited.

According to Colliers data, only four Australian Bunnings sites changed hands in 2022 for $143.3 million in total - down from 13 transactions totalling $485 million in 2021.

The tally excludes a high-net-worth investor's $79.2 million purchase of one of Australia's largest Bunnings stores, in Melbourne's Hoppers Crossing, in September as it’s part of a bigger deal.

Rather than subdividing the 5.5-hectare site between Bunnings and an Amart Furniture store, the private investor paid $99.6 million all up for the single title.

According to Burgess Rawson, the $79.2 million apportioned towards the income from Bunnings reflected a record 3.95% net yield in the Bunnings freehold investment market.

Private investors also bought two other Bunnings in 2022, regional sites in Queensland's Mount Isa and Victoria's Swan Hill that sold for $16.2 million and $18.05 million respectively.

ASX-listed Charter Hall Group (CHC) paid $65.3 million for Bunnings Nowra on the NSW South Coast, giving it 66 Bunnings properties across its portfolios.

Details of the remaining 2022 sale, of a Bunnings in regional NSW, are confidential.

Charter Hall has been one of the biggest players in the Bunnings investment space in recent years along with Newmark Capital, whose listed Newmark Property REIT (NPR) owns eight large format retail assets, primarily leased to Bunnings.

Overall retail property investment activity eased late last year with investors cautious about the outlook for interest rates, the cost of debt and inflation.

BWP Trust keen for more Bunnings opportunities

While BWP's focus is on filling any vacancies, store upgrades and extending existing Bunnings leases, BWP Management Limited managing director Michael Wedgwood says the company is also keen to buy more Bunnings sites.

"We're very focused on, particularly if there's any disruption in the market, if there's any opportunity for us to grow the portfolio," Wedgwood says.

Commenting on BWP's first-half results on Wednesday, Atkins says the trust's flat distributable profit of $57.9 million is in line with expectations.

"For the past few years and for the medium term, solid like-for-like rental growth has been offset by higher management fees; vacancies as Bunnings leaves some smaller, older stores for better locations nearby; and more recently rising interest costs."

Wedgwood notes the lack of publicly-disclosed sales of Bunnings warehouses during the December half means there is no market evidence to support any material changes in valuations for the properties.

"In terms of Bunnings Warehouse properties, transaction activity has dropped off," Wedgwood says.

"We think there's certainly a level of resilience in the ongoing valuations for Bunnings properties and the ongoing demand for Bunnings properties if any come to market."

Excluding the Hoppers Crossing Bunnings and Amart deal, the $16.2 million Bunnings Mount Isa sale on a capitalisation rate of 4.29% is the last publicly-announced transaction.

How everyday investors can get exposure to Bunnings

With sale prices over the last two years ranging from just under $10 million to $85 million, buying a property leased to Bunnings is out of reach for most individual investors.

Listed real estate investment trusts (REITs) that own Bunnings sites, like BWP, or Wesfarmers are a more affordable way to get a slice of the Bunnings action.

Atkins believes Wesfarmers shares are the best option.

"If you want exposure to Bunnings, buy Wesfarmers, which owns Bunnings," Atkins says.

"BWP just provides investors with a secure rental income stream, with no material upside from Bunnings earnings growth."

Bunnings, which has 282 warehouses and 67 smaller format stores across Australia and New Zealand, generates close to two-thirds of Wesfarmers' earnings.

Atkins notes BWP has a growing defensive rental stream over a core portfolio of properties that are key to Wesfarmers' Bunnings business.

Major tenant Wesfarmers also owns 24.8% of units in the trust, whose real estate portfolio is valued at $3.1 billion.

Morningstar's fair value estimate for BWP is $3.60 per unit, compared to Wednesday's $3.88 closing price.

Its fair value estimate for Wesfarmers, whose other businesses include Kmart and Officeworks, is $41 per share, compared to Wednesday's $49.69 closing price.