COVID-19 pandemic has deep implications for the Sydney's commercial property sector: HTW

COVID-19 pandemic has deep implications for the Sydney's commercial property sector: HTW
Staff reporterDecember 7, 2020

The COVID-19 pandemic has had broad-reaching implications for the commercial property sector and will continue to do so for some time, according to the latest report from valuation firm Herron Todd White.

"Whilst neighbourhood shopping centres currently resemble ghost towns and are struggling with often only the anchor tenants trading, we also have real concern for local retail shopping precincts," the firm said.

"These local retail strips, particularly in inner city areas, are usually the life of a suburb, however with local cafes, bars, pubs, restaurants, clothing retailers, beauty services and gymnasiums almost all being forced to close, these strips are also near deserted."

The report illustrated that established retail strips built almost entirely around restaurants and late night trade such as Crown Street in Surry Hills, Oxford Street in Paddington, King Street in Newtown and Darling Street in Balmain are bearing the brunt of these closures.

Other usually strong retail precincts including the CBD, Bondi Beach and Manly have also been severely impacted by the abrupt halt of tourism and additionally in the case of the CBD, the closure of most offices.

Understandably, based on this lack of trade, tenants are seeking rental relief from their landlords.

"In addition to this, we are seeing significant increases in vacancy rates with tenants not renewing existing leases and properties that were available preCOVID-19 remaining on the market with agents reporting little to no interest," the firm continued.

"There have been very few transactions from which to gauge how the rental market is performing."

Some limited evidence has indicated significant reductions in the rental rates being achieved in Sydney.

A recent example of a property in Darlinghurst, that only managed to achieve 30 per cent of the rental it had previously received in 2019, was provided in the report.

"On a more positive note, there are some locations that seem to have weathered the storm better than others," the report said.

"Macleay Street, Potts Point has seen many retailers continue to trade throughout the pandemic and as a result, the increase in vacancy does not appear to be as significant as we have seen in other retail precincts."

"This can be explained by the demographic and typical trade base for these retail shops, which is generally considered to be mostly locals.Further, the high proportion of the population living in units in this area has meant that many have relied on local businesses throughout the pandemic."

Much like the near halt in retail leasing activity, sales activity is minimal with often only properties that were on the market prior to the pandemic being transacted.

That said, the majority of campaigns have been withdrawn from the market or moved from being an active auction campaign to an expressions of interest campaign.

Therefore, the firm found that it is very hard to gauge where the market currently sits.

"We do note that there have been a few recent investment sales, indicating that there is some demand for well-located retail assets with strong lease covenants that are considered low risk."

"In completing valuations of retail assets during this period of uncertainty, we are reflecting the current risk associated with vacancies and adjusting letting up periods based on the current market activity and enquiry level being reported by local agents."

"Looking ahead, we are of the view that investors will shy away from retail assets as they are considered to be highly volatile, with the risk of lengthy vacancies higher than usual and the overall lack of demand for space likely to result in a decline in values."

The firm concluded that there is a defined path to recovery for the retail sector, however the sector faced significant challenges in the immediate future.

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