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Is retail the most resilient property investment in Australia?

Categories: Commercial, Retail

Retail property investment is being hailed as incredibly resilient in the face of the pandemic. Here are five reasons why.

Retail property investment is being hailed as incredibly resilient in the face of the pandemic.

Retail sales have trended downward since the pandemic began, but recent figures are showing a huge uptick in retail sales growth. The reason? There are plenty. One, for example, is that when a lockdown ends, those who’d been confined to days, weeks, or even months inside their own four walls, are dying to go out and spend.

For investors, interest in the retail sector in 2021, even for those premises with a tenant in essential services, is dwarfed by investor appetite for other asset classes. This is a big reason for retail investment’s lack of attention in property publications.

Industrial real estate, and certain parts of the office property sector, has been the blinding light that’s caught most commercial real estate investor’s eye in the last 18 months. This is understandable given the unstoppable demand for logistics and cold storage premises in Australia’s logistics-fuelled industrial property boom. But it’s forced many retail premises to go undervalued in the eyes of investors with capital to burn.

This blog post is dedicated to those investors.

5 reasons retail could be commercial property’s most resilient sector during COVID-19

Ability to bounce back after lockdowns

“One thing we do see – at the end of every lockdown, everyone just wants to get out to restaurants and go shopping.”

That’s Angeline Mann, Commercial Director of Herron Todd White Sydney, speaking in HTW’s July 2021 month in review about how her city’s lockdowns have caused shopper appetites to be bottled up during lockdowns, before exploding like a cork from a champagne bottle once restrictions lift and in-person shopping and dining can continue.

She reminds us that it’s all relative, of course. While restaurants, large format retailers, and grocery stores may see a huge uptick in foot traffic once lockdowns end, industries such as travel are still plagued by COVID-19, in ways their retail counterparts don’t need to worry about.

Essential services

Lockdowns have a retail blind spot. Cities may close, curfews may be put in place, and stay-at-home orders may mean little to no public activity. However, there are essential services that continue to operate and kick goals for the retail sector while the rest of the retail industry takes forced leave.

Supermarkets, service stations, and even hardware stores, have been considered essential by government standards. So, once a lockdown hits, these operators – and their landlords – rest easy knowing the flow of customers will continue.

There has also been a growing interest in neighbourhood and sub-regional shopping centres in particular precincts. Sub-regional shopping centre assets are providing an average 6.5 per cent yield, according to CBRE Research, with neighbourhood shopping centre yields hovering above the 6 per cent mark and regional shopping centres offering an average yield of approx. 5.5 per cent.

Large Format Retail remains retail’s golden goose

According to CBRE’s Australian Retail Market Review for the June Quarter in 2021, the nation’s large format rents increased 9 per cent year-on-year. Sydney experienced a huge 23 per cent increase, while its goliath neighbour, Melbourne, saw a rent increase of 5.5 per cent year-on-year.

The pandemic hasn’t stopped many LFR outlets from achieving stellar sales growth during COVID-19. JB Hi-Fi, Baby Bunting, and Bunnings have recorded healthy growth across all major cities, despite snap lockdowns threatening foot traffic. Baby Bunting’s total sales in FY21 were up 15.6 per cent to $468.4 million.

Landlords are finding LFR assets to be very resilient in the face of pandemic lockdowns. For us and our investors, we have seen little to no rent relief requests from our large format retail tenants.

As a result, the appetite for investment in large format retail properties across Australia is on the up, according to CBRE, with ten assets transacted over the June 2021 Quarter totalling $291 million.

Ability to adapt

HTW’s retail experts have said that a premise which provides the ability to utilise additional space, such as outdoor seating for restaurants, are receiving higher value from investors and tenants. (Sydney City Council have even placed concrete barriers on streets to allow venues receive continued patronage.)

And while eCommerce was once only a threat to traditional retailers, it’s now being considered as a tool for these operators to continue trading.

Online ordering, whether for restaurants which were once sit-down-only establishments or for bricks and mortar shopping outlets, has assisted traditional retailers in avoiding inertia during state-wide lockdowns. Many small businesses, from local florist shops to coffee windows, have given their websites some much needed lipstick during the COVID period, providing delivery to their loyal cliental and keeping their head above water until some form of normality returns.

But who knows? Maybe these creative and proactive retailers will continue their pandemic-inspired initiatives long after the final coronavirus case is recorded in Australia.

Government support

On 28 July 2021, the Commonwealth and Victorian governments announced they will fund a $400-million business support package for the retail community. The Victorian government will also provide a lifeline to landlords who support tenants. The push from the top is for landlords to continue helping their tenants while COVID-19 plagues the community.

While this alone mightn’t be a good enough reason to invest in retail, it provides an insight into a healthy retail property investment strategy… We’ve harped on about landlords helping tenants during crises, at least for those tenants with a genuine need for rent relief. This ensures a mutual benefit among the two interested parties of a commercial premises, and it’s refreshing to see the government drive this support with financial aid for considerate landlords.

There is also some deliberation (in our camp at least) on whether the government’s decision to begin quantitative easing has healthily impacted the retail sector. The injection of liquidity (money) into our economy has perhaps influenced consumer confidence, which is currently expected to hit 100 by the end of the September Quarter. (As an indicator, above 100 signals a boost in consumer confidence towards the future economic situation, in which case they are less prone to save in the next 12 months; more inclined to spend.)

Vacancy remains landlords’ biggest risk

HTW’s Angeline Mann says, “Whilst the existing traders might be doing well, it doesn’t mean there’s this rush of people wanting to expand or to open a new business. So, we’re still seeing vacancy high across most of the retail areas.”

But that, as she later points out, makes a solid tenant that provides a secure, stable income stream, even more valuable to retail property investors.

The key and clear lesson here is finding a tenant that will be resilient against a lockdown. You may not need an occupant who’s considered an essential service – although that would be a big win – but one who has shown a proven track record of resilience during past lockdowns.

The next lesson is that it’s not merely the property and its tenant that provide an instant retail shield against the impacts of a COVID-19 lockdown. But ensuring proper management for that tenant in your building. Communication is key so that you ensure you’re up to date with the tenant’s performance during or after a lockdown period. After all, in commercial real estate investment, no one likes surprises.

Is retail property a good investment?

Retail has proven undervalued compared to its siblings in office and industrial.

While the market is still making its mind up on the future of office premises, industrial real estate is the key that many believe will unlock investment success. Many investors are buying industrial assets well beyond their budget just to be a part of the game. This is causing an incredibly competitive industrial market for investors, as we’ve pointed out in recent posts, and potentially inflated some asset values.

Meanwhile, retail hasn’t received anywhere near as much attention. This can be excellent for those who know what to look for when investing in retail properties.

Retail provides investors with robust yields and dedicated tenants.

Yields from retail property investments typically reach between 5 per cent and 8 per cent, and sometimes even higher if the right property is acquired with the right tenant. Essential service tenants are also providing their landlords with very sharp yields right now, and they’ve thus become a targeted occupant for many retail property investors.

Retail is much prettier than its industrial counterpart, and that means it can benefit from a few cosmetic improvements. For example, a new pylon sign on your property’s street sign will increase visibility and may create more flow of customers through your tenant’s doors. At the same time, an initiative like this will improve your tenant’s propensity to renew their tenure in your premises.

Retail has long copped flack for being a falling industry. Its battle against eCommerce, and most recently against COVID-19, has set critics’ sights on the sector with no imagination of how it could possibly return to strength. But those critics, who refuse to imagine the potential of a well-purchased retail asset, with a robust tenant and an opportunity to add value, will inevitably miss out on undervalued investment opportunities.

Don’t be fooled. Retail is an impressively resilient sector – perhaps commercial real estate’s most resilient – and may be worth considering in your investment strategy.

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