Retail not always the best investment
Of all the sectors within the commercial market, most people feel comfortable with retail. And that's only natural, because all your family members are usually going in out of shops as part of their everyday lives.
However, familiarity with something doesn't always make for good investment decisions.
And yet, investors continue to out-bid one another – and are quite prepared to accept yields as low as 3% per annum – for some retail investment properties.
Inherent in such decision is the belief there will be a significant rental increase not too far away.
But store rent has been outstripping store sales for quite a while. And turnover is unlikely to reach its long-term growth level 4% any time soon.
That means a significant re-adjustment is about to take place within the retail sector.
There are two structural changes driving this inevitable change:
- Australians were net spenders in 2005, but we now have a historically high 11.5% savings rate.
- Traditional retailers shot themselves in the foot by highlighting the presence of online shopping, which is currently at 6%. Westfield Group is predicting this will reach 10% of sales over the next five years.
Bottom Line: Not all retail properties are at risk, because it all comes down to your tenant.
Food and hardware outlets near new housing estates (for example) will be in high demand. As will traders who have wholesale or corporate clients in addition to their in-store traffic.
However, if you currently hold retail property with specialty tenants (like fashion or gifts), now would be a good time to rationalise your portfolio.