Melbourne retail market steady at the peak: HTW Retail

Melbourne retail market steady at the peak: HTW Retail
Staff reporterDecember 7, 2020

The Melbourne retail investment sales market has generally remained steady throughout 2019 with firm yields reflecting the limited availability of quality stock and solid purchaser demand, according to the latest retail report from valuation firm Herron Todd White.

They found particularly strong results for well located properties with long term leases to major national retailers and for those with longer term development potential. We have continued to see varied results throughout the wider market.

There have been a number of examples of heavily declining rents which, when coupled with already sharp yields, is resulting in downward pressure on capital values in some areas.

The Melbourne CBD retail market has experienced reasonable levels of leasing demand within the retail core. The Melbourne retail rental market continues to be impacted by changes in consumer behaviour and varied consumer confidence.

The HTW valuers said, "there has been an increasing level of tenant demand from food based operators and an ongoing decline in demand from consumer goods retailers throughout the Melbourne CBD, although we are aware of a possible oversaturation occurring within this sector."

"Subdued consumer spending is causing pressure on retailers’ occupancy costs and downward pressure on rents"

"Discussions with a number of leasing agents throughout Melbourne has identified an emerging trend whereby tenants are seeking to secure short initial terms, sometimes as short as one year, with a number of further option terms which allows for flexibility in the short term but some security and certainty to retain premises should the location prove suitable for the business."

"From a landlord’s perspective, these flexible leasing terms are attracting tenants, covering operating costs and providing for reviews to market should the leasing market improve."

"In addition to the above we have also witnessed a number of tenants being more aware of the impact that significant incentives have on the net effective rents. Tenants appear to now be more open to negotiating lower face rents in lieu of rent-free periods or fit out contributions which provides more transparency for the tenant and landlord," the valuers stated.

Downward pressures on rents in suburban retail strips persisted throughout 2019 with some areas such as Chapel Street continuing to experience high levels of vacancies coupled with decreasing rental rates.

The report authors added, "overall whilst demand for quality retail assets remains strong, particularly for well-located properties which have long term leases and strong lease covenants, there is evidence that tighter commercial lending criteria is restricting access to funds for many potential purchasers."

"Financial institutions are placing an increased focus on factors such as security of income, lease covenant and length of remaining lease term in assessing serviceability of debt."

"As a result of the reduction in the borrowing power of purchasers, we are beginning to see a slowdown in the constant price rises seen over the past five-year period," they concluded.

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