Brisbane retail market struggling

Brisbane’s retail property sector continues to struggle in the wake of the floods and general economic uncertainty, with rents, yields and values expected to remain flat for the remainder of 2011, according to Herron Todd White’s June review of retail property markets.

The following are edited extracts from Herron Todd White’s June Month in Review report.

The fall in national retail turnover (down 0.5% in March 2011) was driven by Queensland, which had negative growth of 22.9% growth.

In Brisbane, general national economic uncertainty following the release of the Federal budget and the tough economic situation overseas, particularly in the US, has been further exacerbated by the recent floods and a declining population growth rate. Resultantly, growth in retail spending has been depressed.

Retailers’ profits and their ability to pay rent have been affected by the depressed spending environment, and many have gone out of business.

Small independent retailers have been most impacted, and many have gone out of business.

The centres experiencing the greatest vacancies are the older buildings that are not well maintained in secondary retail locations.

Yields have generally stabilised across the sub-sectors. Brisbane CBD yields range from 6.25% to 7.25%, prime neighbourhood centres with a strong tenant such as Coles or Woolworths range from 7% to 8%, and well-located convenience centres with a strong tenancy mix are also achieving yield ranging from 7% to 8%. Secondary yields are between 8% and 9%, with others above 9%.

Yields for bulky goods centres have ranged from 8.5% to 10.5% and suffered at the early stages of the economic downturn, in particular those properties over $10 million.The keener yields have generally been for well-located properties under $5 million. 

The near term outlook for retail investment yields is for them to remain stable.

With the prevailing economic uncertainty, the possibility of further interest rate rises and the impact of the Brisbane floods, we anticipate that consumer confidence and retail spending will remain soft for most of the year. Consequently rents, yields and values for retail property are expected to remain flat in 2011.

Sydney

Rental rates for prime retail space within the CBD were relatively unaffected by the downturn in the financial sector. That’s not to say, however, that the market did not record a significant fall in demand, it just so happened that this fall in demand coincided with a considerable reduction in supply, with the withdrawal of the Mid-City Centre and the majority of space within the Westfield Sydney City re-development.

While the supply of prime retail space eventually increased in the CBD following the completion of the new Mid-City Centre and the gradual reopening of Westfield Sydney City, it was met by an increase in the demand from consumers as conditions in the financial sector improved.

As of May 2011, only 4.9% of super-prime shops were vacant within the CBD. Outside the CBD, the retail market is less exposed to the performance of the finance sector and is more correlated to the general economy. Reflecting the downturn in retail turnover growth and the subsequent increase in the household savings rate, the demand for retail property throughout Sydney has waned, impacting the rental rates of both prime and secondary strip properties throughout Sydney. At an institutional level, however, activity has increased, with several neighbourhood centres changing hands.

Canberra

 Despite the ACT economy being driven by the public service, a far less volatile sector than those driving other state economies (mining, manufacturing or tourism), changing consumer preferences and limited regulatory flexibility is creating a two-tier retail market within the capital. 

At the bottom end of the market, a shift in preference away from the traditional group and local centres in favour of civic and larger town centres has caused occupier demand rental rates and subsequently capital to values fall within some of these smaller locations. 

At the other end of the market, continued population growth is driving demand for retail facilities within the capital. Development approvals and site sales for supermarket developments has increased.

This includes the approval of the Dickson Centre master plan and the $14.38 million purchase of a 21.35-hectare site in Casey for the development of the new Casey centre.

Looking forward, weaker consumer spending is expected to be offset by higher population growth, subsequently driving the take up of these new developments.

Market conditions for some group and local centres, however, will remain depressed, as consumer preferences continue to favour larger retail formats.

Melbourne

The major industries of Melbourne are the automobile industry, information technology and education. In addition, three of the most important industries of Australia have their headquarters in Melbourne, including Telstra, BHP Billiton and the National Australia Bank.

Victoria retail turnover has been performing strongly, with a significant disparity between Victoria and statewide performance.

The Melbourne CBD retail market is traditionally low yielding, but it has generally provided good capital growth for investors. 

Prime retail property in the Melbourne CBD continues to be tightly held and highly sought after. However, these properties are still dependent on average disposable income, which affects the tenant’s ability to pay rent. Nevertheless, investors continue to compete strongly, resulting in record low yields and strong capital growth.

The market is clearly dominated by private investors prepared to pay a premium for prime retail locations.

A good example of a recent Melbourne CBD investment sale is 269 Swanston Street, Melbourne. The property is zoned Capital City Zone 1 and situated on the busy Swanston Street towards the corner of Lonsdale Street. It is an older two-storey brick building with many period features including bluestone walls and stained-glass windows. The building underwent refurbishment works in 2006. The property has a land area of 179 square metres and was sold in March 2011 for $6.5 million. It was sold fully leased to Dumplings Plus at a net passing income of $202,873, reflecting an initial passing yield of 3.12%.

We anticipate prime retail yields, rents, and vacancy rates to remain stable throughout the remainder of 2011.

These key performance indicators will be influenced by retail turnover figures, interest rate pressure, lending cautions of the major banks and the continuation of online overseas spending linked to the stability of the Australian dollar.

Despite combined pressures of the Australian dollar, prevalence of overseas internet shopping and pending interest rate rises, it is reported that the Melbourne retail

market is cautiously optimistic. However, this optimism is only on the basis that obstacles in the way of retail growth are balanced by improving “core” economic conditions and investor confidence continuing to improve along with unemployment rates declining further.

Adelaide

Retail turnover in South Australia has shown negative growth since July 2010, mostly contributed to by the increases in cost of living, which had led to a decrease in discretionary spending.

Large increases in water rates to cover the cost of building the desalination plant (and to run it), the newly released increases in electricity rates to cover the cost of new infrastructure and the increase of 5% to 6% expected in capital value released by the Valuer-General will all further impact upon retail spending as more money from people’s pay packets are taken up paying bills.

Speculation of an interest rate rise towards the end of the year will put even more pressure on already tight finances.

The expansion of Olympic Dam will be a huge boost to the economy of SA, but the effects will mostly be felt in the medium to long term. In the short term there seems to be little light at the end of the tunnel for the retail sector.

Perth

The retail property sector has so far this year been relatively subdued in terms of sales turnover, although stock levels have been limited as owners of retail properties, particularly at the premium end, would likely have little motivation to dispose of these assets as they generally provide good and reliable returns on investment.

The largest price transaction this year is the sale of 1429-1433 Albany Highway, Cannington, which sold for $6.65 million in March, revealing a passing yield of approximately 7.4%. The property sold fully leased with a WALE of approximately 39 months, however two tenants possess a further five-year option and the other tenant two further five-year options.

The overall value of the state’s mineral and petroleum operations is massive, having totalled approximately $102 billion in the year ending December 2010, an increase of more than 50% over the previous year and roughly equivalent to the total aggregate exports of Queensland, New South Wales and Victoria.

This increase occurred despite global financial and economic turmoils and the high Australian dollar.

The state unemployment rate is currently at about 4.1%. Nationally the figure is higher, although below 5%.

With such low unemployment numbers, mining wages and salaries in the state have risen – mining employees in WA are the highest paid in the world.

Low unemployment and relatively high wages are perhaps the most important drivers of the retail sector with retail turnovers continuing to climb, albeit with signs of plateauing after 10 years of consistently high growth.

Despite the overall growth, in every market there are a proportion of winners and losers.

The fortunes of the mining sector can also impact negatively on the retail sector. For instance, many retailers have suggested that keeping staff has been difficult while so many opportunities for employment are available in the mining sector.

Furthermore, the rising retail turnover has depended to some extent on the heavy discounting by retailers, consequently reducing retailers’ profits.

Most department stores in the city appear to be on a never-ending sale, and the Coles and Woolworths battle over market share has resulted in a price war that has lasted for some months.

Overall it appears that retailers will continue to face quite serious challenges in the year ahead, as the state’s consumers have limited capability to keep spending in the face of rising costs, despite their solid employment and high wages.

It is likely that over recent years most home buyers have been buying bigger and borrowing more, hence are also facing difficulties in maintaining debt costs. Many housing loan facilities also incorporated a flexibility allowing homeowners to access equity in their homes to purchase cars, boats and non-housing goods.

Therefore the typical drivers of the retail sector have to some degree been negated by excessive debt.

Reduced retail profits will have an impact on the retail property sector. However owners of retail properties would have little motivation in the current circumstances to dispose of their assets.

While it is likely that their returns will diminish if retail profits continue to decline, the decline will be occurring following years of high positive growth in property revenues. As with all commercial properties, it will be the lower end of the market which will experience the greatest volatility in values.