As residential markets pick up, so does demand for bulky goods – white goods and furniture – creating a resurgence in large format retail property sales.
As residential markets pick up, so does demand for bulky goods – white goods and furniture – creating a resurgence in large format retail property sales. Investors should look to new homemaker centres in growth areas showing an upswing in dwelling commencements, mixed with established housing.
In its latest Insight report into Key Australian Retail Transactions, Savills Australia found that a resurgence in large format retail property sales is tracking the housing market recovery, with sales in the past two years totalling nearly $1.3 billion.
For the 12 months to December 2014, Savills recorded 16 property sales, amounting to $328 million worth of large format retail property transactions. This was down from the previous year of $892 million worth of sales in 28 transactions, and down from the five-year average of $572 million worth of sales.
“There is interest across the board for large format retail properties because, generally speaking, investors are getting very good value for their money,” says Savills Australia head of research, Tony Crabb. The report points to yields of 9.5 per cent to 10 per cent for larger centres, with short and medium-term lease expiries. It also indicates investors are looking at smaller, well-located properties that may deliver yields of about 7.5 per cent.
According to research by Deloitte Access Economics, new dwelling commencements have been trending up over the past two years, totalling 168,000 in 2013 and likely to rise to a near record 190,000 in 2015.
“The ABS has put average dwelling commencements at 157,000 a year over the past 20 years, so we are looking at a very positive trend that will undoubtedly flow through to the bulky goods sector as householders begin to furnish those dwellings,” says Crabb.
In addition, Savills Victoria Large Format Retail Specialist, Keith Kooloos, points out that big-box facilities are less affected by competition from internet retailers than other sectors of the retail market.
“The internet helps people find what they want to buy, but the vast majority still like to visit the showroom before they commit,” says Kooloos. “Savvy tenants who advertise online attract customers and use the internet to educate buyers on products so that when they arrive in store they know what they want and are ready to buy it.”
“Nonetheless,” says Tony Crabb, “the rising demand for new homes will continue to drive demand for homemaker goods. If the RBA is successful in stimulating growth in the non-resources side of the economy then the retail sector nationally should be a beneficiary of stronger retail turnover growth.”
The report anticipates current market fundamentals will continue to drive investors’ attraction to large format retail property, particularly in key growth corridors. Melbourne’s southeast, northern and western growth corridors are highlighted as areas with substantial population growth that could immediately sustain a large format retail centre.
For investors considering a move into the large format retail sector, Kooloos outlines the key factors to watch:
- The best location is a position with a mix of old and new housing. Established housing is the present market, with occupants renovating or replacing old furniture. They are on top of their mortgage and have disposable incomes. New housing is the future market. Homeowners usually take five years to get on top of their mortgage repayments. They only buy essentials initially and have lower disposable incomes.
- Look at the existing and future population in the catchment. The stronger the demographic, the more disposable the income.
- Does the centre have access to arterials and freeways, ease of entry and egress from the main road, and full directional signage for the main entry and exit?
- Good general exposure for the centre gives brand exposure and centre identity, while a wide frontage maximises the exposure of each retailer.
- Look for simple, uncluttered facades with wider-fronted showrooms (a minimum frontage of 18 metres) and a mixture of tenancy sizes for maximum variety of uses and tenants. An ability to combine or subdivide showrooms maximises size flexibility and segregation of loading from customers. Ideally, there should be 2.5 car spaces per 100sq m of building.
- The longer the average lease expiry, the better. Varying lease expiry dates ensure there is no threat of multiple showrooms being vacated at the same time and prevent tenants colluding to negotiate rents downward. If one tenant occupies the majority of the centre, there is a risk of high vacancy if they leave – short-term weighted average lease expiries (WALEs) can provide an opportunity to increase rental, but can also create risk.
- Take account of rental review mechanisms. An open market at the lease options is preferred to maximise rent growth. Historic low fixed reviews can create an opportunity for high market reviews and subsequent capital gain.
- Are there anchor tenants? Quality tenants attract other tenants and maximise potential achievable rents. A variety of uses attracts more customers. Major names attract more customers, national names are likely to be far more successful and a good retail mix facilitates cross-shopping and comparison shopping.
- Is there much land zoned within the centre’s catchment that could enable the construction of a competing or better centre? Does the centre have a market monopoly because nothing else is appropriately zoned?
- Are the leases with the franchisor or the franchisees? Head company leases are preferable.
- What are the ongoing opportunities? Is there scope to improve signage on pylons as well as on showrooms? The ability of tenants to paint in their corporate livery injects life into the centre and improves their identity. Are there opportunities to maximise the centre’s presentation and landscaping? A good-looking centre attracts customers and tenants. A café on site allows customers to rest and have time out to make decisions. Don’t give customers a reason to leave the centre before purchasing.
- Look for any pitfalls such as restrictive access, poor signage, larger and better centres (either existing or proposed) in the catchment or non-functional layout.
As with all major commercial property investments, combining the right timing with research and analysis helps to minimise risk and achieve long-term results.