Why Entry-Level Assets Continue to Attract Investors

There is no doubt that higher order retail (neighbourhood centres and above) captures most national headlines, particularly in relation to transactions and market movements.
However, well below these high-profile assets, a wide range of lower-value retail properties can be found across various locations. These are generally priced below $10 million and form a significant portion of the total retail landscape across Australia. These include high street shops, strip shops, convenience centres, and smaller ‘large format’ retail properties. In many ways, these are reflective of the real economy and economic trends.

The lower end of the retail market has generally been resilient in recent years, both in capital cities and regional areas. This resilience has, like larger retail properties, been driven by steady population growth, which fuels demand for a variety of goods and services. Furthermore, rental growth has not kept pace with the rapidly rising construction costs. This has limited new developments and increased the ongoing demand for, as well as refurbishment of, older properties.

At the very low end, small freestanding suburban retail properties have been in strong demand from both leasing markets and from owner-occupiers. Occupier demand has come from a range of sources, including professional services, allied health, specialist retail tenants and small businesses. Buyer demand has been driven by self-managed superannuation funds, owner-occupiers, and general investors (primarily due to the low entry-level pricing, which enables smaller investors to enter the commercial market). Yields for such properties are generally in the 5.0% to 6.0% range, but can be lower if there is potential for short- or medium-term redevelopment.

For convenience shopping centres, there has been constrained supply but strong demand over the past five years. Yields have held up well, generally ranging from 5.5% to 7.0%. Vacancies have generally been low in strong economic areas, and rentals are typically in the $400 to $800 per square metre range, which is lower than for higher-order retail.

For large-format centres, leasing demand has been strong in infill areas or those with good population growth, and investor demand is also robust, particularly where the tenants have a national profile. Yields in major urban centres for such properties are generally in the 5.0% to 6.0% range, but can be tighter for national tenants with good lease profiles. Conversely, yields can be softer for those assets with leases to weak local tenants.

Another popular investment form is fast food properties. These are their own asset class and are generally in high demand, with very tight yields for leases to major established chains. However, there is a significantly higher level of risk associated with newer brands that have unproven trading histories.

For an investor, entry-level retail can be either very rewarding or very average. The key things to consider if looking to purchase a retail property are rent levels (i.e. are they above or below market? Is there tenant stress?), levels of vacancy (both current and historic), accessibility, exposure, parking, population growth, extent of competition, lease covenants, upside potential, and redevelopment potential.

Considering the wide variety of factors driving population growth, entry-level retail is expected to keep drawing significant buyer interest and is likely to continue strengthening as an asset class.