Despite soft retail trade conditions, Victorian retail investment activity is on track to achieve record highs in 2018, with already $1.1 billion sold in 2018 to date, according to Urban Property Australia’s (UPA) Melbourne Retail Market Outlook.
UPA said there remains demand from major domestic and offshore institutions to acquire trophy retail assets in Victoria, with the 12 months to July 2018 marking another very active year for the Victorian retail investment market.
Total transactions reached $2.5 billion in 2017/18, the fourth highest volume of retail sales in a financial year and 42 per cent above the long-term average.
Sales volume in 2017/18 was boosted by a number of significant transactions, highlighted by QIC’s recent purchase of two 50 per cent stakes in the Werribee Plaza and Pacific Epping shopping centres which totalled $500 million in June 2018.
According to UPA, domestic institutions dominated Victorian retail sales acquisitions during the period, as many capitalised on the opportunity to invest in regional and major-regional shopping centres with QIC, GPT, Charter Hall and Newmark Property all acquiring major retail assets.
Yields remained stable in the 12 months to July 2018 reflecting the soft retail trade conditions despite the elevated transaction volume.
Within the CBD retail market specifically, UPA said sales volumes fell substantially in the year to July 2018 compared with previous 12 months, which was underpinned by the sale of St Collins Lane for $247 million, which was the largest Melbourne CBD retail transaction in 10 years.
Prime yields for freehold retail assets (excluding shopping centres and arcades) compressed marginally over the 12 months to July 2018 to now range between 3.0 per cent and 4.0 per cent, while prime yields for strata retail assets range between 3.5 per cent and 4 per cent.
Looking ahead, UPA said the volume of Victorian retail transactions across retail asset classes could reach a new record high in 2018, with already $1.1 billion sold in 2018 to date.
Prime strip vacancies still high
Total vacancy across Melbourne’s prime retail strips remains elevated, according to UPA’s report, albeit with vacancy declining marginally to 7.9 per cent as a number of residential developments across the strips were completed.
Of all of Melbourne’s prime retail strips, only the vacancy rate of Toorak Road, South Yarra sits below its long-term average.
Over the year to July 2018, Burke Road, Camberwell; High Street, Armadale; Toorak Road, South Yarra and Acland Street, St Kilda recorded decreases in vacancy. As has been the case since 2012, the vacancy rate of Bridge Road, Richmond remains highest amongst the prime retail strips with the current vacancy sitting at 19 per cent.
UPA said tenant demand for Melbourne’s retail strips has been driven by food-based retailers and service retailing occupants, boosted by the population growth that has resulted from the number of apartments recently completed close to the popular shopping precincts.
Despite the elevated vacancy levels and soft retail trading conditions, investment demand for strip retail assets remains intense with transactions demonstrating yields between 2.5 per cent and 4.0 per cent for properties on prime strips.
Rising population is expected to boost retail trade and lower vacancy rates in the medium term. Looking ahead, rents are expected to stabilise over the short term with vacancy plateauing and landlords gradually adapting to achievable rents.
CBD market stable
Up to July, Melbourne’s CBD retail overall vacancy remained stable to 3 per cent with a slight increase of vacancy within shopping centres compared to premises offering street frontage, which saw vacancies fall, according to UPA.
Over the year, most of the incoming tenants into the Melbourne CBD comprised occupiers from food retailing with international brands also increasing their presence in the Melbourne CBD retail market.
Melbourne CBD-based employment and residential population growth continues to underpin demand for CBD retail space from both domestic and international retailers.
According to the Australian Bureau of Statistics, between June 2016 and June 2017 the CBD residential population increased by 11.2 per cent to reach 46,104, while CBD white collar employment increased by 6 per cent to reach 301,825 in the three years to December 2017.
Furthermore, total inbound international tourism numbers for Victoria increased by 16 per cent to reach 2.9 million over the 12 months to December 2017, with Chinese tourists leading the influx which has supported the continued growth of luxury international retailers in the Melbourne CBD retail market.
Construction of the Melbourne Metro Tunnel project will continue to result in some disruption to retail trade, however longer term it is expected the addition of two new CBD rail stations will positively impact retail trade in Melbourne’s CBD.
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