While conditions for retail tenants have been tough during lockdowns, the luxury end of the market and certain sectors continue to perform strongly.

Herron Todd White Director, Vanessa Hoey said the areas that held up well during the pandemic are carrying on this trend. “Although general leasing conditions in some areas are difficult, there is still good demand within prime locations, particularly from food based and retail service tenants,” Ms Hoey said.

“Some retail leasing segments have shown particular strength in recent months such as international luxury goods retailers who are taking the opportunity to expand their retail footprints in Australian CBDs.

Tenants are seeking greater flexibility including shorter initial terms and are seeking to negotiate lower rents and higher levels of incentives as discounted rent or rent-free periods upon commencement of new leases or renewals.”

Ms. Hoey said that overall, the volume of sales transactions of retail property assets has slowed in recent months. “Due to current economic uncertainty, the effects of higher inflation and rising interest rates, some retail property asset types are likely to experience a softening in yields and correction in values.

Reduced retail spending in addition to rising costs such as wages and energy puts pressure on retailer affordability of rents and other outgoings.

Recent resilience in retail spending is likely due to factors such as delays in higher costs being passed on to borrowers and the significant percentage of mortgage holders with fixed rates, although many of these fixed periods are due to expire in 2023.”
 

According to Ms Hoey, the retail investment market has slowed as interest rates have risen.
 

“Since the implementation of recent cash rate increases, investor demand has weakened considerably for retail properties in secondary locations, particularly within areas with low tenant demand and high vacancy rates

There is still a good level of demand for quality retail properties in strong retail locations from investors, particularly high net worth buyers and those with strong cash reserves and good borrowing capacity.”

Ms Hoey said investment demand for neighbourhood shopping centres, free standing supermarkets and fast-food outlets with long-term leases to major national tenants remains high, as buyers look for more security in the current market.

“Opportunistic investors with access to capital are reducing their exposure to riskier property types and seeking defensive assets with stability of income by redirecting their funds to properties with secure long-term leases to major national operators,” she said.