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Retail Dynamics

Has online shopping killed the retail property star? That has long been the worry but it turns out there is still opportunity in the retail sector, Miriam Bell discovers.

By: Miriam Bell

1 December 2018

As Christmas draws nearer, the crowds drawn to retail outlets grow bigger. All the activity creates a healthy shopping buzz. But, of the three main commercial property sectors, retail is the sector that has struggled the most of late. That’s largely thanks to the rise of online shopping. So are bricks and mortar retail properties still worth investing in, or has online shopping killed the physical store?

With this question in mind, it seems timely to turn the spotlight on to the retail sector and examine it in detail. We talk to the experts to find out what state the sector is in, the trends changing it, the outlook for the sector going forward and advice for keen investors.

State Of Play

Gloomy predictions continue to dominate talk about retail property due to the rise and rise of online shopping. Yet the reality is not quite so dire. Taking a look at Bayleys and Colliers’ latest reports on the sector in Auckland and Wellington shows both agencies hold a positive outlook.

Auckland’s retail sector is healthy, boosted by the strong regional economy, on-going high levels of migration to the city and a rebound in consumer confidence. The overall vacancy rate remains low and, while demand for retail property is strong, supply is scarce. But there is a large amount of retail development in the pipeline.

In Wellington, the retail sector’s fundamentals remain solid although the level of buoyancy witnessed in recent years has eased somewhat. The overall vacancy rate remains low and demand is high. There is a fair bit of development activity but investment conditions remain tight.

Colliers director of research & communications Chris Dibble says that in Auckland rents continue to rise at lower rates relative to long-term averages, with new shopping centres under construction or expansion the exception. “Average prime CBD retail yields are at 5.3%, while regional centre yields are 100 basis points softer.”

Wellington’s golden mile along Lambton Quay and Willis Street has steady occupier demand with limited availability in prime spots, while further out from the central city, shopping centre demand is gaining momentum, he says. “Limited changes in overall leasing activity has meant that gross face CBD prime rents in Wellington increased only slightly, now at $1,318 per m2, up 1.8% in the past year.”

Meanwhile, Christchurch has a relatively flat rental environment in the central retail precinct and Dibble says that is expected to remain broadly similar over the next 12 months.

It’s worth noting that population growth, house price trends, and consumer confidence are all critical factors when it comes to the health of retail markets. They need to be considered when looking at retail property.

RCG Ltd Associate Director John Polkinghorne says Auckland and the upper North Island has enjoyed strong population growth and retail demand has been quite high so there aren’t many vacant shops. “But the regions have a flatter growth outlook and there isn’t the same amount of investor demand, although the outlook has been improving as Auckland’s growth starts to spread around the regions.”

In Auckland, small-scale investors are competing with major institutions and overseas buyers to score the best properties but, in the regions, local investors tend to be the main buyers, he adds. That too creates different market dynamics.

Changing Dynamics

Despite the solid picture presented in the agency reports, there can be little doubt that the retail sector is going through a period of upheaval and change. The growth of online retail and its impact on traditional retail can’t be ignored.

Veteran commercial property investor Olly Newland says online retail will leave casualties in its wake, but there will also be many who use it to their advantage.

“Retail that thrives in this new age is retail that offers ‘experiences’, like food and beverages, and services, like hairdressers or laundromats. Or retail that sells items which are specialised and can’t be easily bought online.

“It’s retail which sells items that can easily be bought online that is struggling. Think of places like Dick Smiths or DVD shops or even fashion retail. That means investors need to look for the right opportunities – and tenants - accordingly.”

This shift in what is successful in retail has resulted in a big change in the tenant mix now seen in shopping areas, be they malls or neighbourhood strips. For example, in the new Commercial Bay precinct, food and beverage outlets make up about 50% of the space. Once they would have amounted to about 10-15%.

Bayleys national director retail sales & leasing Chris Beasleigh says the buzzwords now revolve around “experience”. “So there has been a reduction in one type of retailer and growth in another – notably food and beverage and service providers, like barbers. They are taking up that space.

“It is all a big change. Ten years ago we were all worried that the High Street would be empty. That hasn’t happened but what is on it has changed. That means investors need to think about the type of retailer they might be looking at as a tenant.”

For this reason, it also pays to look at properties that have the capacity for alternate uses rather than properties purpose-built for a particular type of tenant, he adds. “Also, investors need to keep tabs on what the retail trends are and where they might be going because that affects tenants.”

Is Retail Still Worth It?

These changes to the retail sector make for new challenges and considerations when it comes to retail property, but our experts all say it is still a sector worth investing in. Investors just need to be smart about it.

That means selecting retail property, and the location it is in, wisely, Newland says. “Go for an area where there are lots of other shops so there is plenty of foot traffic. Isolated shops are not as good. Some places – like Newmarket or Queen St – will always be there but will have ups and downs. But shops on the waterfront often struggle as they are dependent on the weather and they have less foot traffic.”

Mixed-use properties – which include retail, showrooms, storage, carparks, offices, and/or residential are becoming more prominent too, he says. “It’s good to think about the predominant use. You need to look at that and if it fits with the neighbourhood and what factors might impact on it.”

Like Newland, Polkinghorne has a positive outlook going forward – albeit a cautious one. Well-located retail property tends to provide good rental returns and cashflow, he says.

“In many locations, it’s hard to see much rent growth on the horizon – in some cases, rent may even go backwards. But it’s important to attract and keep tenants, and get the best rent you can to maintain your cashflow and property value. Investors should consider the different risk profile of each location and property.”

For Beasleigh, the big growth areas like Auckland, Tauranga, Hamilton and Queenstown show promise. That’s because the big growth in population in those areas means more retail, and thus property, needs to come on board.

Retail property can be more of a struggle in some of the smaller regional markets, he says. “But the tourism boom helps here because it is putting people through lots of these centres. So retail investors in those areas need to think about what appeals to tourists, what is needed by them and pitch it accordingly. It can work well.”

‘The buzzwords now revolve around “experience”. So there has been a reduction in one type of retailer and growth in another – notably food and beverage and service providers, like barbers’ CHRIS BEASLEIGH

The environment is also likely to be more challenging for smaller retail properties. Beasleigh says they will need to continue to evolve and act as a point of difference to the larger retail hubs by tailoring more of their offering toward local needs. “Find a niche and develop it.”

Words Of Wisdom

Purchasing a retail property should be undertaken like any other major investment decision. Investors need to have a long term strategy, do comprehensive due diligence on the property, the area and the tenant, and get sound independent advice.

Dibble says any property purchase needs to be thoroughly considered, but investors in retail property typically need to be more of an active investor rather than a passive investor. “Get involved, understand your tenants’ strategy and business model to make sure the tenant is on a path to success in an increasingly discerning era of customer centricity.

“Make sure the tenant understands their unique selling point, who their competitors are, is selling products that are not readily available online, haven’t had any experience in the sector or are paying rents well above what is considered to be a market rate.”

A good retail investment does depend on the local market and its scale, but Newland says the basic principles apply wherever you are. He also agrees that having a good tenant, and a solid working relationship with that tenant, is key.

“Investors shouldn’t be frightened to buy a retail property. Look at everything and know where a good deal is and go with it. Don’t be restricted by only wanting to buy a hairdresser in a certain suburb. Take the time to go through the clutter to find the gold.”

Retails Investor: Hadar Orkibi

Established investor Hadar Orkibi purchased a “strip mall” retail building with a two-bedroom flat upstairs in 2014. His tenants include a pizzeria, a café, a gift shop and a women’s clothing shop. To date, he is happy with his investment. The property had its second rent review recently and he is now receiving higher rents with no push-backs from the tenants.

He believes retail properties are still worth investing in – providing the location is good and if you can put together a deal that would de-risk vacancy. Orkibi says he would buy more. “If I had the opportunity to get in to medicaltype retail I would strongly consider it But it would have to be in an area where I feel there is sufficient population growth.”

In his view, multiple tenancies are always better than a single tenant. “Investors should look for multiple incomes and a structurally sound building. They should want a property in a solid location with room to add value. An under-rented property that has been owned by the same owners for a long time can be good.”

Orkibi says retail investors should go for a long lease with a personal or bank guarantee. “When buying, look at the business and their operators, seek to strengthen the lease to a longer term as they have more value. When managing, be there to communicate with the tenants, and address their needs – within reason.”


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