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Butcher, baker and candlestick maker drive rents in Victoria’s neighbourhood shopping centres

Property Markets / Outlook

Australia

Apr 10 2019

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Australia’s retail sector has been in a state of flux throughout the past three years, as the effects of online, large-format and specialist retailing have grown more pronounced, according to one commercial property agency.

Savills Australia has released its latest research report, the Q1 2019 National Retail Quarter Time, highlighting the vastly different outcomes across states and sub-sectors.

“Given the vastness of Australia’s physical landscape, a relatively low shopping centre supply per person, and a lower penchant for exclusively shopping online compared to other developed nations, it is not surprising that Australia’s retail sector has been comparatively resilient,” director for Research & Consultancy, Shrabastee Mallik, said.

The report reveals that movements in rents varied considerably across the different centre and tenant types in Victoria.

Ms Mallik said there were notable revisions to recorded rents across regional, sub-regional and neighbourhood centres. 

“While supermarket rents across all centre types remained stable, we saw rents move down for discount department stores in sub-regional centres to an average of $235 per square metre, reflecting a 3.9 per cent fall during the 12-month period to March 2019,” she said.

“Interestingly, the average went down as a result of downward revisions to the high end of the range, rather than the low, in a reflection of the times.

“We are now at a stage of the cycle where landlords are carefully considering the levels at which they pitch their rents. 

“With many of these discount department stores coming under increasing scrutiny about their low prices coming at the cost of ethics and sustainability, we are probably going to see more of these retailers negotiate their leases in their favour, as the pendulum remains firmly in favour of tenants.”

Indicating that neighbourhood centres were still performing well, the report shows that specialty tenant rents recorded growth in the March quarter, rising 8.3 per cent in the 12-month period to March 2019.

Specialty tenant rents across regional and sub-regional centres fell in the same period.

“As people become busier, there is a greater demand for neighbourhood centres to be a one-stop shop, with more and more local neighbourhood centres providing a streamlined non-discretionary experience,” Savills national head for Retail Investments, Ben Parkinson, said.

“Landlords are able to carefully target their rents in these centres in line with changing consumer tastes and preferences. 

“There is a greater demand for quality food products, with an increasing number of consumers demanding fresh produce like fruits and vegetable, meats and bread from specialty retailers, rather than from the supermarkets.”

Savills director for Retail Investments, Rick Silberman, said that retail centres across Victoria had the highest total returns nationally, recording an annual return of 7.7 per cent in the 2018 calendar year. 

“As this compares favorably to the long-term average, it is clear that investor demand for Victorian retail assets remains strong, particularly given that retail trade has been performing well above long-term averages throughout the past five years, in spite of the rise of the online retail sector,” he said.

According to Savills report, in the 12 months to March 2019, investment volumes for retail assets nationally were at their highest level on record.

“In the 12-month period to March 2019, we saw a record $2.83billion of retail assets transacted – more than double that of the previous annual period,” Mr Parkinson said.

“Of this total, 60 per cent were transacted by domestic institutional investors, while domestic private investors accounted for 23 per cent. 

“In stark contrast, foreign investor activity in Victoria has been muted throughout the past two years, after foreigners transacted nearly 63 per cent of total retail sales volumes in the 12-month period to March 2017.”

Most of this transactional activity occurred across regional (34.4 per cent) and sub-regional centres (30.3 per cent), followed by the more tightly held neighbourhood centres (15.3 per cent).

“Neighbourhood centres in Victoria are not traded as often as in other states, mainly due to the fact these centres are generally privately held, often by families, over a long period of time,” Mr Silberman said.

“However, the strong metrics on neighbourhood centres mean that they are in high demand, and when they are put up for sale, the competition to acquire them is quite fierce. 

“Not surprisingly, average capital values across Victoria’s neighbourhood centres recorded gains in the 12-month period to March 2019, rising 5.0 per cent.”

Ms Mallik said Savills maintained a positive outlook for the future of Victoria’s retail sector.

“Not only has total retail turnover growth been above long-term averages, growth across discretionary retailing such as ‘clothing and footwear’ and ‘hardware and garden’ has been notably above long-term averages, in an encouraging sign for discretionary retailers.”

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