HTW expect increased Melbourne retail tenancy disputes after new State Revenue land tax valuations

Melbourne’s retail market continues its strong run and continues to improve, according to Herron Todd White’s latest report.

The property valuation firm says that 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% to 6.5% for CBD shopping space and 3.5% to 5.5% for the Bourke Street Mall.

St Collins Lane, formerly Australia on Collins, which completed a $30 million upgrade in 2016, sold in November 2016 for $247 million on an initial yield of approximately 5% and a rate of $27,444 per square metre,” the report stated.

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.

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," the report tipped.

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.

Meanwhile, council valuations are released on a two yearly cycle and council rate notices for 2017 are now becoming available, it advised.

"As land values have generally risen markedly across metropolitan Melbourne it is highly likely that land tax bills will also increase.

"Landlords are likely to face higher land tax bills from the State Revenue Office.

"Under current Victorian state based legislation (the Retail Leases Act 2003), landlords are unable to recover land tax from their retail tenants unless the occupancy cost (rent and outgoings) exceeds $1 million per annum or the tenant is a listed corporation or a subsidiary of a listed corporation.

"Consequently, owners may try to recover higher occupancy costs through increases in rentals which tenants may resist.

It is therefore possible that higher land tax costs could lead to more lengthy and greater numbers of dispute resolution processes relating to tenancy occupancy costs.

“For example, we are aware of one large retail site in Hawthorn where the site value increased from $10.05 million in January 2014 to $11.223 million in January 2016 with the current land tax bill increasing from $183,600 to $210,000.

Although the Melbourne retail investment market currently appears to be strong and purchaser interest for retail properties is relatively high, we are of the view that this is led by an optimistic buyer perception of the market direction and may not ultimately reflect what is actually happening with tenant demand, affordability and achievable investment returns on a property,” the report stated.

There appears to be a discrepancy between capital values and rental income growth as capital values within precincts experiencing this exponential growth appear to be indicating strong growth whilst rental income growth appears to be moderate in comparison.

As such, the market within these precincts may be more strongly affected by economic volatility.

The Melbourne retail market has experienced a significant strengthening in purchaser demand over the past 12 to 24 months.

We have witnessed several strong results in recent times and it is worth noting that there is a perception of a rising market at present.

A downturn in the economy or a softening in local market conditions could lead to downward pressure on demand and price in the short to medium term.

Purchasers and tenants alike are advised to ensure due diligence and proper market research is conducted prior to making purchase and rental decisions.