Herron Todd White’s latest Month in Review highlights the ongoing strength of entry-level retail property.
Director Alistair Weir (pictured) noted that while large-scale retail centres tend to dominate headlines, smaller properties remain a key part of the market.
“There is no doubt that higher order retail (neighbourhood centres and above) captures most national headlines, particularly in relation to transactions and market movements,” Weir said. “However, well below these high-profile assets, a wide range of lower-value retail properties can be found across various locations. These are generally priced below $10 million and form a significant portion of the total retail landscape across Australia.”
He explained that these include “high street shops, strip shops, convenience centres, and smaller ‘large format’ retail properties,” which closely reflect real economic trends.
The report said that demand has held up well across both metro and regional markets.
“The lower end of the retail market has generally been resilient in recent years, both in capital cities and regional areas,” Weir said. “This resilience has, like larger retail properties, been driven by steady population growth, which fuels demand for a variety of goods and services.”
The backdrop of monetary policy has also supported conditions. The Reserve Bank’s recent decision to cut the cash rate by 25 basis points to 3.6% is improving borrowing capacity for investors, though affordability challenges remain due to tight housing supply.
Weir added that rising construction costs have “limited new developments and increased the ongoing demand for, as well as refurbishment of, older properties.”
At the smaller end, freestanding suburban retail properties are attracting significant occupier and buyer activity.
“Occupier demand has come from a range of sources, including professional services, allied health, specialist retail tenants and small businesses,” Weir said.
Buyer demand has been supported by SMSFs, owner-occupiers and general investors drawn to accessible entry pricing.
“Yields for such properties are generally in the 5% to 6% range but can be lower if there is potential for short- or medium-term redevelopment,” Weir said.
With borrowing conditions easing slightly after the RBA’s cut, these lower-value assets remain attractive to smaller investors able to leverage increased capacity, particularly when yields are holding firm.
Convenience shopping centres are also proving resilient.
“Yields have held up well, generally ranging from 5.5% to 7%. Vacancies have generally been low in strong economic areas, and rentals are typically in the $400 to $800 per square metre range, which is lower than for higher-order retail,” Weir said.
He also pointed to continued demand for large-format centres in growth areas.
“Yields in major urban centres for such properties are generally in the 5% to 6% range but can be tighter for national tenants with good lease profiles,” Weir said. “Conversely, yields can be softer for those assets with leases to weak local tenants.”
Weir said fast food properties remain a category of their own.
“These are their own asset class and are generally in high demand, with very tight yields for leases to major established chains,” he said. “However, there is a significantly higher level of risk associated with newer brands that have unproven trading histories.”
“For an investor, entry-level retail can be either very rewarding or very average,” Weir said.
The HTW leader said buyers should weigh factors including “rent levels (i.e. are they above or below market? Is there tenant stress?), levels of vacancy (both current and historic), accessibility, exposure, parking, population growth, extent of competition, lease covenants, upside potential, and redevelopment potential.”
He added that construction cost pressures and long build times are still weighing on new supply, meaning well-located existing assets are likely to keep attracting attention in an environment of easier credit.
Looking ahead, Weir expects strong demand to continue.
“Considering the wide variety of factors driving population growth, entry-level retail is expected to keep drawing significant buyer interest and is likely to continue strengthening as an asset class,” he said.
Visit the HTW website for the full report.
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