Perth retail property continues to battle challenging conditions: Herron Todd White

Perth retail property continues to battle challenging conditions: Herron Todd White
Perth retail property continues to battle challenging conditions: Herron Todd White

The retail property market in Perth continues to face challenging conditions, according to the latest report from valuation firm Herron Todd White.

"Demand for retail space remains hampered by restrained consumer spending coinciding with the state’s sluggish economic performance," the firm found.

Additionally, online retail spending continues to grow rapidly and apply further pressure on the Perth retail market.

Despite some renewed optimism in the resource sector, confidence in general remains depressed, according to the March report.

The above has translated generally speaking to rental rates for retail premises experiencing a downward trend over the past 12 months with incentives in the form of net rent-free periods or fit-out contributions prevalent.

Landlords are being faced with the option of renegotiating lease terms to maintain occupancy or alternatively, risk extended periods of vacancy.

"These conditions are more prevalent in secondary and suburban strip locations, although it appears that prime CBD mall and high street locations including Oxford Street, Leederville, Beaufort Street, Mount Lawley and Bay View Terrace, Claremont are now beginning to experience a similar situation with vacancies becoming commonplace," the firm said.

"Investment grade retail property such as neighbourhood shopping centres however remain a highly sought-after asset. Yield compression is evident, largely driven by the low prevailing cost of funds in the current debt finance market and despite the general malaise that continues to impact the wider Western Australian economy including softening rentals and a steady stream of business failures and receiverships, the report found.

"However, there are a certain number of key metrics that informed investors consider, relating to length of remaining lease term, financial strength of the tenant(s) and locational attributes, as investors take advantage of the spread between the low cost of debt and large format retail investment yields."

Where all or a majority of these metrics are satisfied, very tight yields are being achieved in the current market. Assets that do not possess these key criteria are however less sought after and often transact at a much higher yield reflecting the greater tenancy risk.

In defiance of the above however, sites in the aforementioned high street locations remain keenly sought after despite the level of tenancy risk.

This is a function of the scarcity of sites offered to the market in these locations and the high underlying land value. Yields for similar sites below 5.5% are not uncommon.

In respect to investment grade retail transactions, there were a number of such sales of late within the Perth metropolitan area. All were hotly contested and attracted offers between 5.00% and 6.25%. Interestingly, the yield differential between Coles or Woolworths anchored centres and those anchored by IGA or Metcash (or even Aldi) remains pronounced and in the order of 0.75% to 1.25%.

Despite the conditions described above, institutional owned major regional and subregional shopping centres within Western Australia have pushed ahead with expansions following the removal of the cap on maximum retail floor space and the state government’s push to create activity centres.

These expansion projects will have a focus on delivering a better retail experience for shoppers with the creation of food hubs, entertainment options (such as cinemas), health care and in some cases, residential apartments.

As a result, some envisage these centres becoming community centres as opposed to traditional shopping centres in the future.

Herron Todd White's report concluded that opportunity does exist for investors with an increased risk appetite to acquire some of the less sought-after assets in the market place at yield premiums, or assets which would benefit from repositioning or capital expenditure.

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