The entry-level retail sector is sparsely reported and largely ignored by institutional investors, but it is a fundamental part of a start-up investment strategy for first-time investors.
The sector is very broad, with a wide diversity of investment types, from corner and strip shops to small large-format properties, to medical centres, to strata retail opportunities. In many senses it is a ‘messy’ end of the market with varying degrees of manager skill, great diversity of tenants and more regular vacancies. Shops are frequently of variable size and sometimes less than desirable layouts. Nonetheless, they offer a significant degree of opportunity, particularly if you are prepared to be a more hands-on owner.
The opportunity presented by properties in the low end of the market includes refurbishment and repositioning prospects, value-add through tenancy enhancement, occasional potential to add to the GLAR and the capacity to lift rents where such properties are under-rented.
The principal attraction of the low end of the market is the entry-level pricing, with many properties available in the main capital cities at a sub $2 million price tag, and in regional towns, many are available below $1 million.
Yields are extremely variable, ranging from sub-5 % where there is a solid long-term prime tenant. Such properties may include branded fast food restaurants, tyre centres or prime strip centres. Typically, however, tenants are of a lesser quality, and yields reflect the higher levels of risk. At the present time, yields for average quality sub $3 million investment properties in the capital cities are generally between 5.5% and 6.5%. For the regional towns, yields would generally be 50 to 100bp higher.
When considering investing in entry-level retail investment property, there are several key checklist items. These include checking for tenant stress (i.e. are the rents at market, or too high?). If too high, the risk of tenant failure is significantly greater.
Are the physical characteristics of the building good? i.e. is the structure sound, well maintained, of good design?
Does the property have good exposure, access, and parking? These factors are crucial in determining the ability of the property to be re-let in the event of vacancy.
Has the tenant been there for a long time, and how long is the outstanding lease term? Are they sticky tenants who are unlikely to leave?
If a strata retail property, are the outgoings reasonable, and are there any issues with the Body Corporate?
On the positive side, there may be properties where rents are below market, where there is refurbishment potential, or where there is unutilised land.
Given the above, an investor must decide whether they want a truly passive set and forget investment, or a hands-on property with upside. The beauty of the low-end investment market is that it does cater to all needs, albeit it may take a period of time and patience to find a property that fulfils your personal investment goals.