By Scott

 

When we think of retail property, our mind instantly goes to urban High street shop fronts. As we’ve seen, these thriving strips are far from becoming the retail graveyard once prophesised at the peak of lockdown. Although the CBDs are the areas doing it tough right now, they’re not the only type of retail property to consider.

 

[Read: Retail Property is still breathing; who would have thought?]

 

In this blog, Commercial Property Specialist Scott Meighan, guides us through the different types of retail properties, highlighting some of the key insights to keep in mind and the average yields each of these returns.

 

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Suburban Strip Retail

These are predominantly local retail centres usually including healthcare, banks, services and hospitality.

Key considerations:

  • Higher land values due to the retail precinct being ‘land-locked’ and surrounded by established residential catchments.
  • Opportunity for multiple income streams if properties are multi-level, such as ground floor retail and first floor office or residential which includes separate entrances.
  • Zoning ordinances which dictate future use and development potential.
  • Immediately surrounding development or construction activity that may hinder tenant/customer access and attraction, resulting in extended vacancy periods or short-term rental reductions.
  • Older improvements that require thorough inspection prior to purchase to avoid short term capital expenditure requirements.

 

Usual Yield Range: 3% – 5%

Key Due Diligence Focus: Surrounding development and building improvements.

 

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Metropolitan Neighbourhood Retail

These are smaller precincts that largely service the immediately surrounding residential population. There are usually at least 4-6 and sometimes up to 20-30 shops for lease.

Key considerations:

  • Potential for value-add via;
    • refurbishment to increase rental income and attract high quality tenants; and
    • redevelopment for additional income streams such as apartments above retail shopfronts.
  • Can be subject to restrictive zoning and local government planning such as heritage overlays and objections from local residents.
  • Tightly held land parcels sometimes passed down in families for generations.

 

Usual Yield Range: 4% – 6%

Key Due Diligence Focus: Planning ordinances, suburb profile.

 

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Large Format Retail

This type of retail usually enjoys strong tenant profiles through national brands and head office leases – no security deposits or guarantees are usually provided as these big businesses are well funded and have strong balance sheets

Key considerations:

  • Long initial lease terms are usually offered with a minimum 5+ year lease terms and in some cases, up to 10-12 years.
  • Usually located within a precinct among similar tenants, including competition.
  • Minimal tenant specific fit-out; the properties usually comprise clear span, high clearance warehouse improvements.
  • Higher priced entry points due to size of tenancies and rent per annum.
  • Minimum management assets.

 

Usual Yield Range: 5% – 6%

Key Due Diligence Focus: Rental rates, development supply and WALE (weighted average lease expiry) if there are multiple tenants.

 

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CBD Retail

These are the classic downtown city spaces usually occupied by big brand shops and department stores. There are many nuances including high and lower value streets, neighbouring tenants, foot traffic and exposure. It’s often a hyped and highly marketed area as much as it is a physical location.

Key considerations:

  • High rental rates per square metre which vary depending on the amount of foot traffic and position with city centre (for example, close to a public transport terminal).
  • Tenant profiles can range from luxury retail brands and high-end fashion to start-up hospitality businesses.
  • Continued development in CBDs can result in tenants being incentivised to occupy newer buildings through rent-free periods and landlord fit-out contribution.
  • High entry price points and low yields for freehold properties.
  • Very tightly held and often ‘old money’ or overseas investors or funds (depending on the size) are buyers for these assets.

 

Usual Yield Range: 3% – 5%

Key Due Diligence Focus: Tenant profile and lease security.

 

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Regional Retail

These are precincts in the centre of regional towns and smaller cities. This is definitely an asset class to watch, particularly given the exodus of WFH city dwellers who are snapping up regional property.

Key considerations:

  • Tenants are usually loyal to a location provided the rents are in-line with market values.
  • Smaller businesses usually prefer to be close to major national brands (ie: Bunnings, supermarkets, department stores), taking advantage of the foot/vehicle traffic these businesses attract.
  • Other towns/suburbs whose residents require travel to the larger area are included within the ‘trade catchment’.
  • Current or planned development of larger shopping precincts and centres, outside the traditional ‘High Street’ retail strips, around which these towns/cities are built.
  • Typically slower adoption of online shopping and residents who view retail precincts as community spaces.

 

Yield Range: 6% – 8%

Key Due Diligence Focus: Trade catchment analysis and vacancy rates

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1Group Property Advisory specialise in Commercial Property Advocacy & Investment Acquisitions with a dedicated team of researchers and buyer’s advocates. If you’re looking to invest or would like to have an initial discussion to find out if commercial property is suited to your investment goals, you can reach Scott on 0419 143 650.