The retail sector has had a difficult few years and now faces the headwinds of high inflation according to the latest Herron Todd White (HTW) Month in Review.
In the August report, HTW Commercial Director, Alistair Weir said while there was national retail growth of 10.4 per cent in May, the outlook remained uncertain.
“The outlook for retail is now looking more unsettled as the rapid escalation of interest rates, coupled with significant inflation, start to dent consumer optimism and household spending capacity,” Mr Weir said.
“Whilst not yet statistically evident, the impact of interest rate rises will likely impact retail sales in the months to come.
“The most vulnerable retail markets are likely to be those catering to the discretionary end of the market.
“We note that the strong performance of large format centres over the past two years has now moderated significantly.”
Mr Weir said on a national level, vacancy rates had stabilised at around seven per cent, but this was not evenly spread, with CBD markets suffering the greatest impact from the loss of workers, tourists and students.
“The most dramatic effect was in Victoria ,where long-term lockdowns decimated CBD retail markets in particular,” he said.
“Rent levels appear to have stabilised after debilitating lockdown periods, but there were also significant rental declines in major regional and CBD areas during Covid.
“Conversely, neighbourhood, large format and convenience centres have performed strongly and were the primary beneficiaries of lockdowns and work-from-home environments.”
According to Mr Weir, the rising interest rate cycle, which kicked off in May, has created a buyer standoff, with investors expecting boom time prices and buyers anticipating softer yields.
“Whilst not even across all asset classes, there is now general acceptance that yields have softened by circa 50 basis points for most retail types from the peak, with the potential for this to blow out further should interest rates continue rising,” he said.
“For secondary properties with poor lease profiles, this softening is likely to be even greater.”
Mr Weir said there will continue to be opportunities arising in retail markets, with good population growth, significant infrastructure expenditure and the resumption of tourism likely to drive specific markets.
“Prudent investors will increasingly need to be cautious if economic conditions deteriorate and interest rates rise further,” he said
“There is an increasing need to look under the hood of retail investment properties as tightening economic conditions have the potential to create greater levels of tenant stress with consequent downward pressure on rentals.”
HTW Commercial Director Angeline Mann said the retail sector had been slower to recover following the lockdowns of 2021.
“Investors in the retail market are cautious and are typically looking for secure assets with long-term leases that deliver good returns,” Ms Mann said.
“We have seen prime assets and those with national tenants performing well, however secondary assets and those with poor income streams have not performed as well.
“Looking at entry-level retail, there is an abundance of stock available, in particular strata retail on the ground floor of mixed-use developments.
“It is still possible to purchase these units for under $1 million.
“In some instances these can be tenanted but often they are simply bare shell or new stock.”
HTW Valuer Helen Truelove said the Melbourne retail market was recovering after the State Government lockdowns destroyed businesses in the CBD.
“There are very limited retail opportunities under $1 million in the CBD,” Ms Truelove said.
“These comprise small strata-titled units in secondary locations which may be vacant. Freehold properties in the CBD are tightly held and limited transactions occur.”
Ms Trulove said during the remainder of 2022 and into 2023, the Melbourne retail investment market was expected to see a continuation of the varied results experienced over the past couple of years across different market segments.
“Depending on a range of factors, not least the increasing cash rate, yields are expected to remain somewhat stable for retail properties in strong retail locations with essential retail and service tenants,” she said.
“It is expected that yields may soften further for retail properties in secondary locations, particularly in areas with low tenant demand and high vacancy rates.
“It should be highlighted that should yields soften and if rental levels are not able to be increased, there will be significant downward pressure on capital values.”
HTW Director Terry Munn said the start of 2022 saw the retail market continue the recovery that began in late 2021.
“There are no retail property sales to date that confirm that yields are softening, however we feel that it is only a matter of time before they do,” he said.
“As with all cycles it will start with the secondary properties or forced sales and eventually filter into the prime assets.
“Towards the second half of 2022, landlords are anticipated to increase their rental incentives in order to secure good tenants.”
HTW Commercial Director Chris Winter said the South Australian suburban retail property market remain subdued, with achievable rental figures not showing signs of increase.
“The retail market has faced significant difficulties since COVID-19 with multiple lock downs having the largest effect on this sector of the property market, particularly for café, takeaway and gym uses,” Mr Winter said.
“The retail market within the Adelaide CBD has also remained flat with the same issues pertaining to COVID being magnified as workers who would usually transit to the Adelaide CBD for work remained at home, in some cases permanently.
“This has resulted in lower foot traffic and patronage which has affected the cash flows of these businesses within the CBD, with landlords often having to provide incentives in 2021 which may still be in effect in 2022.”
Mr Winter said the outlook for the retail property sector in the future remains unclear.
“These uncertainties and rising costs for tenants will likely stifle landlords’ attempts to secure higher rentals in the future, with tenants having less money left over to spend on rent,” he said.
HTW Director Greg Lamborn said the Western Australian retail sector, have endured the worst of the trading restrictions imposed by the COVID-19 pandemic, but have now been bolstered by the cash surplus created by government stimulus measures.
“Certain retailers have found themselves achieving near record sales and revenue in 2022,” Mr Lamborn said.
“No doubt there is some uncertainty about whether turnover will gradually align to historical trading levels.
“Prospective buyers, often based in the eastern states and seemingly undeterred by the recent interest rate rises, remain focused on the length of agreed lease terms, prospects for rental growth and depreciation benefits.
“On a smaller scale, local activity centres and traditional high streets are retaining their appeal to customers for their convenience-based shopping, despite their much-publicised trading difficulties.”
HTW Director Terry Roth said there were limited opportunities in Darwin for a smaller scale investor to participate in the retail market.
“The larger centres such as Gateway and Casuarina tend to monopolise the shopper dollar because they can offer an air-conditioned environment (important even in this year’s cool dry season) along with a controlled tenancy mix and easy parking, however petty crime in these larger centres continues to be a problem,” Mr Roth said.
“Retail property in Darwin has generally been stable in value over the past few years.
“Whilst retail trade conditions have improved, this is offset by an increasingly uncertain economic environment, especially with rising interest rates.
“Taking all these factors into consideration, we do not see a significant change in market conditions over the next 12 months.”