Investment in Sydney retail assets will shrink: HTW

Like most other assets, transaction volumes for Sydney retail assets can be seasonal, however volumes are more likely to be a response to economic drivers, according to the latest report from valuation firm Herron Todd White.

The property valuation firm found, buyer activity for retail assets is typically a result of several factors. These include local businesses looking to purchase their existing tenancies, owneroccupiers wishing to secure their location, investors seeking retail assets with strong, long term lease covenants, and demand from developers wishing to secure and amalgamate sites.

Sales activity for retail is primarily driven by fluctuations in capital values.

In a strong market, investors typically look to capitalise on their investment and reinvest in other areas with greater growth prospects. In some instances we have also noted some businesses upsizing or expanding.

Conversely, some sellers are motivated by increasing vacancies and it is not uncommon to see a newly leased asset placed on the market for sale.

Increases in holding costs and perceived risks can also drive retail assets onto the market. The move to online shopping has forced some retailers to close storefronts thus increasing the sales volumes.

A driving factor of supply and demand for retail in some areas is the surge of residential property values which has coincided with an increase in the redevelopment of mixed use sites. This trend has been ongoing for some 10 years.

This surge in redevelopment has seen an increase in the supply of ground floor retail space, which is often required under the planning provisions. A good example of this trend can be seen across South Sydney, which saw a surge in retail supply when developments reached completion.

This has led to an oversupply of such stock, which has now been an issue in some areas for some five to ten years.

In other areas, adaptation to changing demands has resulted in renewed tenant demand. Examples of this can be seen in Redfern and Summer Hill. These two local retail precincts have traditionally been dominated by local businesses that service the local population and whilst this remains the case, both of these areas have seen an increase in demand as they become go to locations for small restaurants and bars.

HTW Valuers noted, "the COVID-19 pandemic continues to have implications for the Sydney retail property market. We are currently concerned about smaller retail precincts, particularly inner-city areas that rely heavily on food and beverage sales."

"Some areas have seen severe increases in vacancies. In other areas we are witnessing a slow return to normal with increases in trade leading to a revival and the slow reopening of some businesses."

"Overall, we are predicting rental reductions and an increase in required incentives in some areas, which we anticipate will result in a decline in capital values. Whilst there are currently few sales to demonstrate the impact the pandemic is having, some of those that have occurred have shown a decline in value."

"We have also noted an increase in properties available for both sale and rent in some areas and some difficulty with off the plan strata retail that is now coming up to settlement in a diminished market."

"We maintain the view that investment in retail assets will diminish as they are considered to be highly volatile and, as a result, we anticipate a decline in values. The retail market is facing a long recovery period for which we cannot know the full extent as yet", they concluded.