Melbourne retail investment market remains steady: HTW Commercial

The Melbourne retail investment sales market generally remained steady towards the end of 2019 with firm yields reflecting the limited availability of quality stock and solid purchaser demand, according to the latest report from valuation firm Herron Todd White. 

 “We have seen particularly strong results for well located properties with long term leases to major national retailers and for those with longer term development potential. We have continued to see varied results throughout the wider market,” the firm found.

There have been a number of examples of heavily declining rents which, when coupled with already sharp yields, is resulting in downward pressure on capital values in some areas. 

The March report indicates that financial institutions are placing an increased focus on factors such as security of income, lease covenant and length of remaining lease term for assessing serviceability of debt. 

As a result of the reduction in the borrowing power of purchasers, see signs of a slowdown in the constant price rises over the past five-year period are beginning to appear.

When on the market for sale, some retail properties are experiencing extended selling periods, particularly vacant retail assets and those in secondary locations. As the wider retail market continues to evolve and adapt to the challenges, we are witnessing retailers looking to differentiate and reinvent themselves in the market. 

Online retailing continues to place downward pressure on bricks and mortar retailing however will likely continue to play an important role in a brand presence. 

According to the Australian Bureau of Statistics, retail trade in Victoria rose 0.3 percent from November to December 2019 with an annual increase of 2.8 percent from September 2018 to December 2019. 

Nonetheless, many retailers are expecting difficult operating conditions throughout the first half of 2020. 

"A number of retailers are now rationalising their footprints by way of reducing store sizes and in some instances, closing underperforming or unprofitable stores. The downward pressure on rents in suburban retail strips experienced throughout the majority of 2019 is expected to continue throughout 2020 with tenants continuing to seek short initial terms, sometimes as short as one year, with a number of further option terms which allows for flexibility in the short term but some security and certainty to retain the premises should the location prove suitable for the business," the firm added

From a landlord’s perspective, these flexible leasing terms are attracting tenants, covering operating costs and providing for reviews to market should the leasing market improve. 

There is also a continuing trend of tenants being more aware of the impact that significant incentives have on net effective rents. 

Tenants appear to now be more open to negotiating lower face rents in lieu of rent-free periods or fit out contributions which provides more transparency for the tenant and landlord. 

During 2020, the Melbourne retail investment market is expected to see varied results across different market segments. 

“We are of the opinion that yields will remain stable for retail properties in strong retail locations such as the major strips in the Melbourne CBD and inner suburbs such as Collingwood and Fitzroy in addition to retail assets such as supermarkets which have long term leases to major national retailers and for properties with longer term potential for redevelopment. It is likely that yields may soften for retail properties in secondary locations, particularly within areas with low tenant demand and high vacancy rates,” predicted the firm. 

As in previous years, the Melbourne CBD and inner suburban retail rental markets will continue to be heavily impacted by population growth, changes in consumer behaviour and varied consumer confidence. 

Some areas, such as Chapel Street, South Yarra and Bridge Road, Richmond will likely continue to experience high levels of vacancy as a result of the ongoing shift away from traditional retailing towards service and food based uses. 

Outer suburban retail markets, in particular those outside established retail locations, will likely be impacted by larger operators who are opting for a more centralised model of retailing appealing to consumers demanding a more convenient and interactive shopping experience.

Smaller retailers unable to sustain the higher rental rates typically demanded within modern centres will struggle to adjust to the larger number of vacating tenants along older retail strips unable to provide the convenient experience modern consumers demand, the report concluded.