Retail property to provide only modest returns to investors by 2022: BIS Shrapnel

Retail property to provide only modest returns to investors by 2022: BIS Shrapnel
Retail property to provide only modest returns to investors by 2022: BIS Shrapnel

Commercial property investors are likely to shift their focus away from retail property and focus on better-performing office and industrial assets, according to a new report by BIS Shrapnel

In its latest forecasts for retail property to 2022, BIS Shrapnel expects only modest retail turnover growth over the next decade principally due to the rise of online shopping and an oversupply of new retail floor space.

According to BIS Shrapnel, the growth of online spending overseas helps explain why consumer spending in total (including overseas online spending) is growing at a solid pace but retail turnover growth is subdued.

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Australians are also travelling overseas more and spending their retail dollars abroad.

Both of these factors are likely to continue to be a drain on retail turnover growth as long as the Australian dollar stays high, says BIS Shrapnel, which declares that the golden age of retailing has come and gone and won’t be returning.

It is forecasting annual retail growth of 2.9% per annum over the next five years compared with the “halcyon era” of retailing from the mid-1990s to GFC, when it averaged close to 5% per annum due to a “debt-fuelled spending surge by consumers”.

The most recent data from the ABS shows that retail turnover rose just 0.5% in May, and is trending up 3.3% on an annual basis.

“Without firming yields to save the day, modest income growth won’t be enough to generate the strong investment returns that investors have become used to,” says report author Maria Lee.

She says prospective returns for regional shopping centres are between 9% and 10% over a five-year and 10-year investment horizon.

“This is OK, but not impressive.

“Some investors are likely to turn their attention to stronger-performing office and industrial property instead,” she says.

Figures compiled by Colliers International for the first half of 2012 show that foreign capital flows into the Australian retail sector made up just 4% of offshore acquisitions (out of a total of $4.06 billion), with the transaction of three assets valued at around $184 million.

However, local investors appear to be more keen, with the privately owned Perron Group paying a post-GFC record of $690.4 million to acquire a 50% share in a portfolio of three Centro flagship regional shopping centres –the Colonnades in South Australia, The Glen in Victoria and the Galleria in Western Australia – in a deal brokered by Simon Rooney, Australian head of retail investments at Jones Lang LaSalle.

Shopping centres in particular are likely to lose their investment sparkle according to BIS Shrapnel due to lower rates of turnover growth thanks largely to the growth of online shopping and the “dilutionary effect of additional retail floor space”.

According to BIS Shrapnel, the construction of new retail floor space continues to outpace both population growth and real retail turnover growth, a long-term trend in Australia, broken only during the late 1990s/early 2000s period of unusually strong turnover growth.

“It’s surprising that this is happening now, when floor space growth is relatively muted due to the challenges facing development in the post-GFC environment,” says Lee. “It means that, in real terms, turnover per square metre is falling.”

Instead, Lee says, some investors are likely to turn their attention to stronger-performing office and industrial property instead.

According to BIS Shrapnel, online retailing has a two-pronged impact - the obvious effect of taking market share from ‘traditional’ retailing, but another effect that could be equally important.

“Consumers are using price comparison websites or apps on their mobile phones when in-store, and then demanding a price match in order for them to buy there and then,” says Lee. “This can have an impact on retailer profit margins.”

She also points out Australians are purchasing more online from overseas retailers.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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