As the housing boom continues, landlords of large format retail property are set to cash in, with the latest report suggesting that rents will rise over the short to medium term as an upturn in demand outweighs the impact of new supply additions.
In its latest forecast, industry research firm BIS Shrapnel says it expects investment in the sector (which is formerly known as the ‘bulky goods’ sector and includes the likes of Bunnings, Mitre 10, IKEA and Masters) to deliver returns which exceed those of many other property sectors. Return on investment is expected to amount to around 12 percent over the next five years.
BIS senior project manager Maria Lee says an upturn in demand driven by improving trading conditions should strengthen over the next three years before moderating and should more than offset a continuation of the recent strength in supply additions.
Furthermore, while growth in demand may be tempered as a weaker currency squeezes retail profit margins, Lee contends that "in those areas with flexible planning policy, it may be possible to bring in retailers capable of paying higher rents and/or less affected by the fall in the Australian dollar."
Having endured several years of poor sales growth, large format retailers in Australia are reaping the benefits as the recent upswing in housing construction and residential property transactions feeds through into stronger sales of things such as hardware, building products, garden supplies, furniture, carpet, floor coverings and electronic goods and textile goods.
Largely because of this, retailers are on the expansion path, with Bunnings opening between 16 and 26 new stores each year and Woolworths saying it wants to open between 10 and 15 Masters stores over each of the next few years.
The latest forecast comes amid growing expectations of a modest lift in broader retail property market, with participants in the most recent Property Council of Australia Property Industry Confidence Survey expecting respectable growth in capital values across the sector over the next 12 months and international real estate services firm CBRE forecasting that rental growth will accelerate from an estimated 1.5 per cent in 2014 to 2.1 per cent in 2015. CBRE reckons large format retail stores will deliver returns of around 10 per cent over the next five years.
Still, the report cautions conditions will vary according to state and catchment area, with larger and more dominant centres likely to be the best performers.
“The improvement in market conditions can be attributed largely to the pick-up in the housing market—greater construction and transaction activity is underpinning home-related expenditure,” Lee said. “The home improvement sector has been slower to recover but has now also picked up.”
“However, the dwelling building upswing is far from uniform across states. New South Wales is particularly strong and should feed through to above average consumer spending on household goods over the next three years.
“By contrast, most other states—with the exception of Queensland—will be notably weaker.”