The Pros and Cons of Investing in Strata Supermarkets

Over the years, I’ve been involved with numerous stand-alone freehold supermarkets as well as strata-titled assets, and one thing is clear: they perform differently and must be managed differently. Supermarkets remain one of the best defensive retail investments in Australia – supported by long leases, strong covenants from national tenants, and consistent customer demand – but the strata overlay introduces complexities that many investors underestimate.

A stand-alone freehold supermarket gives the investor direct control of the land, building, and operations. In contrast, a strata supermarket is typically part of a larger mixed-use development or located beneath a residential tower. On the one hand, this provides everyday convenience to residents and workers nearby and can tap into a growing local population. On the other, it places the investor inside a structure where control is shared, costs can be unpredictable, and long-term flexibility is limited.

That local catchment can be a significant strength, but it comes with risks that are unique to the strata ownership model.

The Advantages of Strata Supermarkets

Before diving into the pitfalls, it’s important to recognise why strata supermarkets continue to attract buyers:

• Ready-made market: Where a supermarket sits beneath a large residential tower or in a dense urban precinct, there is a built-in customer base. This ensures reliable foot traffic from the moment the doors open.

• Growth locations: Strata supermarkets are often developed in areas with strong or growing populations and where new sites are not easy to come by such as inner-city redevelopments, transit-oriented hubs, or gentrifying suburbs. These demographics provide long-term sales growth potential for the tenant.

• Lower entry point: Compared to a stand-alone freehold supermarket, strata-titled assets usually trade at a softer yield, making them more accessible for private investors.

• Percentage rent potential: In some cases, leases on strata supermarkets are structured with lower turnover thresholds, meaning the tenant can move into percentage rent sooner. When achieved, this can offset many of the other risks inherent in strata ownership. You need to be confident, however, about the demand, local competition, convenience, and ability of the supermarket to generate required sales given its often smaller footprint.

  
  

The Disadvantages – Where the Risks Sit

1. Limited Control Over the Asset

Unlike a stand-alone supermarket, where the landlord makes all key decisions, strata ownership hands control of common property and capital works to the body corporate. Investors used to the autonomy of a freehold supermarket often find this the most frustrating aspect of strata ownership.

• Voting limitations: Your influence is based on lot entitlement, not the fact that your tenant is the anchor. Specialty shop owners or residential strata can outvote you on upgrades or maintenance programs.

• Restrictions on improvements: Even small initiatives like signage upgrades or loading dock enhancements require body corporate approval.

• Fixed allocation of costs: Once established in the original Strata Management Statement (SMS), cost allocations are effectively set in stone. Even if they are unreasonable or unfair, they are almost impossible to change.

  
  

2. Body Corporate Costs and Levies

Strata levies can be volatile and are outside the investor’s control. This is a stark contrast to the predictability of managing outgoings in a stand-alone supermarket or small neighbourhood centre.

• Disproportionate costs: Supermarkets often bear a larger share of cleaning, security, landscaping, and common area maintenance costs due to their floor area.

• Outgoings caps: Many supermarket leases have caps on annual increases to outgoings. This becomes a major problem if body corporate costs rise faster than those caps, with you as the landlord left absorbing the difference.

• Insurance premiums and commissions: Insurance is often one of the largest, if not the largest line item in a body corporate budget. In recent years, strata managers have been under scrutiny for the way insurance is arranged, including rising premiums and commissions. Recent ACCC and media attention has highlighted how opaque these costs can be for owners.

• Special levies: Major repairs (roof, fire systems, HVAC) can trigger special levies, creating sudden cash flow pressure.

  
  

3. Governance and Strata Scheme Risks

The quality of management can vary enormously:

• Underfunded sinking funds: If reserves are low, special levies are inevitable. On the other hand, continuously putting money into a sinking fund when no works are required might not suit you as a commercial investor - you might prefer to pay for capex or large maintenance items if and when they occur, and keep the money in your account in the meantime.

• Inefficient committees: Poorly run bodies corporate can delay essential works, harm tenant operations, and prevent you from acting quickly when trading conditions change. In retail, the ability to move quickly on upgrades or repositioning can be your competitive advantage - something strata ownership can stifle.

• Litigation risk: Disputes between owners, or between owners and the body corporate, can drag on for years and damage the value of your investment.

Due diligence must extend beyond the lease to the body corporate’s governance and finances.

4. Tenant Operations and Experience

Supermarkets need reliable infrastructure to trade efficiently. In a strata context, this is not always guaranteed:

• Car parking issues: Residents using retail bays, or locals taking advantage of poorly policed parking, can undermine convenience for supermarket customers.

• Loading dock inefficiencies: Shared access with other retailers or residents may reduce operational efficiency.

• Maintenance delays: With reliance on the body corporate, urgent issues with lifts, escalators, or air-conditioning may not be resolved quickly, impacting trade.

These areas are crucial to maintaining operational efficiency and maximising sales potential.

5. Exit and Liquidity Considerations

While a freehold supermarket typically appeals to institutions, syndicates, and private buyers, strata supermarkets face a reduced buyer pool.

• Institutional avoidance: Most major investors steer clear of strata supermarkets due to their structural limitations.

• Discounted valuations: Valuers usually apply a risk premium compared with freehold assets.

• Constraints on redevelopment: Any future redevelopment requires unanimous or majority agreement among owners, making strategic repositioning almost impossible.

This liquidity discount should be factored into your entry pricing. What looks like an attractive yield today may reflect an illiquidity premium tomorrow.

Conclusion: A Balancing Act

Strata supermarkets can provide secure income, access to high-growth urban catchments, and the possibility of earlier percentage rent upside. But these positives must be carefully weighed against the structural drawbacks: loss of control, body corporate risks, governance challenges, and restricted liquidity.

For private investors and family offices, the key question is: are you comfortable with others having an element of control over your investment?

If your priority is long-term flexibility, intergenerational wealth preservation, and exit liquidity, a freehold supermarket will almost always outperform. But for those willing to take on the complexities, a strata supermarket in the right location, with strong governance, transparent levies, and favourable lease structures, can still be a sound investment.

In short, a strata supermarket is not a passive set-and-forget investment - it demands rigorous due diligence and active oversight if it’s to deliver long term performance.

About the Author Alan Baynash brings 30 years of experience in the retail property sector, having worked with private investors, institutional landlords, and leading agencies. As Principal of TPD Asset Management, he specialises in helping high-net-worth individuals, family offices, and syndicates maximise returns and protect the long-term value of their retail property portfolios.