Retail property market outlook positive: HTW

Retail property market outlook positive: HTW
Retail property market outlook positive: HTW

Movements across all categories of commercial property are being keenly watched as investors look to seek traditional cash flow real estate to help fill out their portfolios, says valuation firm Herron Todd White in its March Month in Review which features the property clock as well.

The latest property clock deals with retail, which hinges on tenant success, and it’s been tough to get ahead for a number of operators in this space, say HTW.

Sydney, Melbourne and Brisbane have joined the Gold Coast, Coffs Harbour and Newcastle at approaching the peak of the market cycle in the retail property clock.

Townsville and Wide Bay remain rooted to the bottom of the cycle with Gladstone the new entrant, while Adelaide has joined Perth in approaching the bottom of the market. Canberra remains at the start of a recovery cycle, along with Cairns.


The retail market in Sydney has seen substantial growth over the past 12 months as a result of increased demand for good investment assets, growth in rental income and generally lower vacancy rates. 

The next 12 months look set to follow a similar trend, say HTW. Increased demand from investors will continue to drive the market. Properties with established retail tenants will be popular this year. 

Late in 2016 we saw some strong sales which showed tight capitalisation rates for assets with strong lease covenants, including some with sub 5% capitalisation rates in the Sydney CBD. 

The demand for CBD assets remains strong as the buzz around infrastructure improvements continues. Generally rents look likely to remain stable this year although an increase in prime locations was evident in 2016 with a strong probability of this continuing in 2017.

Recent media coverage of failing fashion retail chains may have some impact on demand from tenants but food and beverage outlets seem to be going strong in most locations, with demand for these types of retail properties likely to continue. Suburban retail assets with good lease covenants have also seen growth over the past 12 months. This is likely to continue as investors look for strong performing assets with future growth potential. 

Strip retail with a history of good retail trade such as King Street, Newtown; Darling Street, Balmain; and Crown Street, Surry Hills have all seen an increase in sales activity which looks set to continue in an upward trend in 2017. Looking ahead, the outlook for retail in Sydney overall remains positive for 2017.

"We expect prime locations to continue to perform well along with properties perceived to have growth or redevelopment opportunities in the future," say HTW.

"That said we are of the opinion that the market is reaching the peak of the cycle and any tightening of monetary policy or increase in the cost of debt will result in the prevailing investment yields not being sustainable. For the time being though, all signs are that 2017 will be a good year for retail assets."

Among a few examples of recent sales was a cafe at 1/252 Sussex St, Sydney 2000 which went under the hammer at Colliers International auction. 

Retail property market outlook positive: HTW

Another was a three-level retail building at 82-84 Dixon Street, Haymarket, NSW 2000 that was sold through Knight Frank.

Retail property market outlook positive: HTW 


Melbourne’s retail property market has continued its strong run over the past 12 months with supply generally limited and yields firming and reflecting pent up demand and rising prices. The steady low interest rate environment, strong Australian dollar and the ongoing perception of being a safe haven have all combined to drive strong interest from domestic and overseas retail property buyers. 

The Melbourne CBD retail property market continues to go from strength to strength. Despite approximately 50 new shops opening in the 12 months to January 2017, the vacancy rate is stable and below the five year average. 

Rents have remained stable and range from $1,500 per square metre for CBD shopping centre space to $11,000 for Bourke Street Mall frontage while yields range from 3.5 percent to 6.5 percent for CBD shopping space and 3.5 percent to 5.5 percent for the Bourke Street Mall. 

St Collins Lane, formerly Australia on Collins, at 260 Collins Street, which completed a $30 million upgrade in 2016, sold in November 2016 for $247 million on an initial yield of approximately 5 percent and a rate of $27,444 per square metre. The revitalised site offers over 9,000 square metres of retail space over four floors. With street frontage to Collins Street and Collins Lane in the heart of the Melbourne CBD, the centre comprises 60 specialty stores, including international brands such as The Kooples, Reiss, Sandro Paris, TAG Heuer and Coach plus restaurants. 

Retail property market outlook positive: HTW  

The Melbourne CBD apartment construction boom and consequential growing population have been the driving force behind the strong market. With more retailers scheduled to open their doors in the Melbourne CBD, including British retailer Debenhams’ first foray into the Australian market, and more apartment completions, 2017 is shaping up to be another strong year for the retail property market in the Melbourne CBD. 

Within the suburban shopping centre market, owners may however be affected by store closures following the recent collapse of a number of retailers including Pumpkin Patch, Herringbone, Rhodes & Beckett, Marcs, David Lawrence, Payless Shoes and Howards Storage World. 

Many commentators are forecasting more retail brands, particularly clothing retailers or fast fashion competitors, to fold in the face of increased competition from overseas retailers such as Uniqlo, H&M, Zara and the forthcoming arrival of giants Amazon and Alibaba as well as a gradual yet inexorable move to online retailing. 

Store closures may affect suburban shopping centres in particular as it is precisely these shopping centres that the above named global players have pushed into. Local mid-market players are effectively squeezed out both in terms of retail price of clothing and also in costs with overseas players able to negotiate lower rents than their local counterparts.

While the closure of one or two stores may not have much of an immediate impact for shopping centre landlords, over the longer term shopping centre vacancies on a larger scale may combine to push sales growth and rental growth down, subsequently impacting income levels and values of shopping malls.


The outlook for retail markets in Brisbane continues to be generally positive, albeit there is now an increasing perception that yields may finally have reached a low point. To put the story of recent years into perspective, we have seen retail yields generally move by between 150 and 200 basis points, which based on a starting yield of say 8%, translates to capital growth of upwards of 25 percent over a three year period. In some instances, capital growth has been upward of 35 percent. Sales activity has been moderate for the quarter. 

Major transactions include Arana Hills Kmart at $67 million, Everton Plaza at $27.5 million and Caboolture Square at $27.5 million. These showed yields of between 6 percent and 7.25 percent. 

In neighbourhood centres we have seen the first sub 6 percent yield achieved with a shopping centre at Tewantin selling at a yield of 5.9 percent. At the convenience end of the spectrum there has been less activity with only two centres selling under $10 million. Both of these were in the North Lakes region and showed yields of between 6.5% and 7 percent. 

Overall, the volume of sales activity has generally been low, primarily as a result of a shortage of stock and lack of other strong yielding investment options. With the perception however that yields will be bottoming out, we anticipate a rise in investment sales activity, particularly if interest rates start to rise and there is any suggestion of capital values starting to fall. Retail rentals continue to be reasonably restrained with ongoing difficult trading conditions in many sectors putting the brakes on rental growth.

The weakness is evident across the board as high levels of competition, flat wages, internet retailing and changing consumer shopping patterns all contribute to a very tough retail environment. Good buying opportunities in the market are limited at present as all reasonable assets are heavily scrutinised by a wide number of investors. There is potentially some more opportunity to value add with secondary centres but even these are holding their value fairly well making owners reluctant to sell.

Below are two examples from North Lakes cited by HTW.

Click to enlarge

Retail property market outlook positive: HTW


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