Retail property sales have slowed, as economic uncertainty climbs according to the latest Herron Todd White (HTW) Month in Review.
In the November report, HTW Director Vanessa Hoey said there were currently fewer active buyers and sales were taking longer to transact due to the gap between vendor and purchaser expectations.
“Due to current economic uncertainty, the effects of higher inflation and rising interest rates, some retail property asset types are likely to experience a softening in yields and correction in values,” Ms Hoey said.
“Reduced retail spending in addition to rising costs such as wages and energy puts pressure on retailer affordability of rents and other outgoings.
“Recent resilience in retail spending is likely due to factors such as delays in higher costs being passed on to borrowers and the significant percentage of mortgage holders with fixed rates, although many of these fixed periods are due to expire in 2023.”
Ms Hoey said retail leasing conditions were challenging across the country and downward pressure on rents for retail tenancies was evident.
“Tenants are seeking greater flexibility, including shorter initial terms and are seeking to negotiate lower rents and higher levels of incentives, such as discounted rent or rent-free periods, upon commencement of new leases or renewals,” she said.
“Although general leasing conditions in some areas are difficult, there is still good demand within prime locations, particularly from food-based and retail service tenants.”
More positively, some retail leasing segments have shown particular strength in recent months, such as international luxury goods retailers who are taking the opportunity to expand their retail footprints in Australian CBDs.
According to Ms Hoey, the retail investment market has recorded varied results over the past 12 months.
“Since the implementation of recent cash rate increases, investor demand has weakened considerably for retail properties in secondary locations, particularly within areas with low tenant demand and high vacancy rates,” she said.
“There is still a good level of demand for quality retail properties in strong retail locations from investors, particularly high net worth buyers and those with strong cash reserves and good borrowing capacity.”
Ms Hoey said investment demand for some retail property types, such as neighbourhood shopping centres, freestanding supermarkets and fast food outlets with long-term leases to major national tenants, remains strong as buyers seek secure investments.
“Opportunistic investors with access to capital are reducing their exposure to riskier property types and seeking defensive assets with stability of income by redirecting their funds to properties with secure long-term leases to major national operators,” she said.
Sydney
HTW Commercial Director Angeline Mann said the retail sector in Sydney has been somewhat subdued throughout 2022.
“The sector has been slower to recover post the lockdowns of 2021, with rising interest rates and lack of confidence in the local economy starting to be felt,” Ms Mann said.
“Established areas within Sydney, with a history of strong retail trade, are performing reasonably well although there is noticeably less interest.
“Generally speaking, those with a lower entry point but established retail trade are performing well.
“Assets with good lease covenants seem to be in favour. Investors in the retail market are cautious and are typically looking for secure assets with long-term leases that deliver good returns.”
Melbourne
HTW Associate Director Nathanial Ramage said the longer-term impacts of extended lockdowns and reduced foot traffic in Melbourne were still having a negative impact on many retail tenants, in particular food and beverage operators.
“Yields have generally remained stable for some retail properties in strong retail locations with essential retail and service tenants,” Mr Ramage said.
“Some retail property types such as supermarkets and national fast-food outlets have shown significant resilience since the onset of the COVID-19 pandemic and have continued to strengthen throughout 2022 with yield compression evident due to an abundance of capital seeking investment.
“We have started to witness more examples of softening yields for properties in secondary locations or vacant properties with low levels of leasing demand.
“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.”
Mr Ramage said there continue to be many factors at play in the market including inflationary concerns, recent and likely further interest rate rises and the possibility of a global economic recession.
“These factors make it difficult to predict how the local economy and property markets will perform in the short to medium-term, although market fundamentals suggest an increasing likelihood of a downward correction in values,” he said.
Brisbane
HTW Director Terry Munn said late 2021 was the peak of the retail investment market with a few deals falling into the early stages of 2022.
“Comparing now to the start of 2022, the retail market to date has surprisingly been very resilient,” Mr Munn said.
“The full impact of the recent interest rate rises has not yet been fully reflected in the market, although it will only be a matter of time before we start to see a genuine softening of yields.”
Mr Munn said agents had told him vendor expectations were still high and there was a reluctance to meet the market.
“In general terms, the retail leasing market has stabilised, although it is not evenly spread and there is an increasing level of variance between prime and secondary retail centres,” he said.
“There has been no real rental growth, however, we have seen an increase in incentives, particularly for new or refurbished premises.
“2023 may well be the year that we see a bona fide correction in the market and the body of evidence to support this conclusion.”
Adelaide
HTW Commercial Director Chris Winter said the suburban retail market in Adelaide remained broadly stable with minor improvements in 2022 for both rents and yields while inner city locations struggled with the fallout of lockdowns.
Mr Winter said one asset class that had performed well was neighbourhood shopping centres.
“Neighbourhood shopping centres were perceived to provide more secure returns than other assets as they are often strategically located within their respective localities, and they are populated with nondiscretionary retail tenants,” Mr Winter said.
“Non-discretionary spending has been resilient in COVID and the continued price rises and business profitability has neighbourhood shopping centres well placed to continue to perform well.
“Given their strategic locations and soaring construction costs, these assets are unlikely to face new competition in the near future, meaning established well-performing assets are expected to continue to do well.”
Perth
HTW Director Greg Lamborn said demand for local retail assets from eastern states-based buyers continued throughout the year, even against a background of rising interest rates, with the yields on offer in Western Australia remaining above and beyond those available in the eastern states’ markets, particularly NSW and Victoria.
“As expected, investment-grade retail property remained a highly sought after yet tightly held asset in 2022, meeting key criteria that sophisticated investors continue to seek such as long remaining lease terms non-discretionary tenancy mix backed by strong lease covenants and sound locational attributes with a growing population catchment,” Mr Lamborn said.
“Traditional high streets and suburban shopping hubs, despite much-publicised trading difficulties and visible vacancy, retained their convenience-driven customer pull.
“In fact, it could be argued that such destinations benefited from the work-from-home movement, especially those located in middle and outer-ring residential suburbs.”
Mr Lamborn said with a lack of transactional activity, it is too early to confirm what impact interest rate rises may have, but combined with other macro-economic headwinds, there are likely to be further challenges for the retail sector next year.
Darwin
HTW Director Terry Roth said Darwin had not enjoyed anywhere near the property boom of other capitals, and this should mean that Darwin is at less risk of large price falls over the next few years.
“The outlook for major projects should mean an increased demand for property, which would be consistent with Darwin’s historic countercyclical property markets compared to the rest of the country,” Mr Roth said.
