May 2020 – Melbourne Retail Market

  • Online retail trade in Australia continues to gradually take a larger share of overall spending, having grown by 36% over the year to March 2020;
  • Investment activity across the retail sector has fallen significantly with weak investor sentiment for major centres.
  • Retail Market Summary
  • Retail turnover growth continued to moderate through 2019 which resulted in an increasing number of retailers entering voluntary administration. Investor sentiment has also deteriorated significantly since the spread of the COVID-19 pandemic given the uncertainty towards the outlook for income and vacancy.

Retail Strips & CBD Market

Total vacancy across Melbourne’s prime retail strips remains elevated, with vacancy continuing to increase, having now risen to 10.2% as at April 2020 reflecting the subdued trading conditions and reduced discretionary spending. The vacancy levels of the iconic retail strips of Chapel Street, South Yarra and Bridge Road, Richmond remains highest amongst the prime retail strips with the current vacancy sitting above 17%.

Tenant demand for Melbourne’s retail strips continues to be driven by food-based retailers, typically at the expense of clothing retailers. While the growth of food retail in the strips has been underpinned by the number of apartments recently completed close to the popular shopping precincts, increasingly retail is being driven by experiential shopping.

Despite the elevated vacancy levels and soft retail trading conditions, investment demand for strip retail assets remains solid with transactions demonstrating yields between 3.5% and 5.0% for properties on prime strips.

Looking ahead, rents are expected to stabilise over the short term with vacancy plateauing and landlords gradually adapting to achievable rents.

As at April 2020, Melbourne’s CBD retail overall vacancy remained steady at 4.6%. Vacancy in the CBD was driven by a rise in vacancy within shopping centres as a result of a number of store rationalizations and retailer administrations. Street frontage vacancy also increased reflecting the challenging retail conditions many occupiers are experiencing.

Reflecting the softening discretionary retail spending conditions, food retailers continue to expand their presence in the CBD retail market having previously been underpinned by record residential population growth and strong international student and tourism numbers.

Rental rates across the Melbourne CBD retail core have remained stable over the past 12 months, however incentives have increased marginally.

Prime yields for Melbourne CBD retail assets range between 3.0% and 4.0%and are expected to remain steady in the short term reflecting the challenging retail conditions.

Sales Activity

Investment activity in the Victorian retail property sector significantly declined in 2019 reflecting the broad softening in purchaser sentiment. Over 2020 to date, Urban Property Australia has recorded only $75 million in retail property sales, the lowest volume of retail sales for the first quarter in 10 years. Transaction activity is expected to remain significantly below average with investors still cautious of the retail sector.

While private investors and syndicators continue to actively seek prime retail assets below $30 million, maintaining the current low yield environment, yields for major shopping centres (in excess of $75 million) have softened over year to April 2020. The softening in yields for major retail assets reflects the adjustment for income in light of the challenging trading conditions and increased capital expenditure required to ensure that shopping centres remain relevant to the changing consumer trends.

Melbourne Retail Transactional Activity by Type

Retail Trade

Although the rate of retail trade growth rose over March 2020, the increase was driven by panic buying with annual growth rates below the 10-year average and below levels recorded a year ago. Over the year to March 2020, Australian retail trade grew by 3.1%, which was underpinned by spending in the Food sector. The trend of slowing retail trade growth has also adversely impacted individual retailers with more 1,000 stores having closed as 20 retailers fell into voluntary administration.

Since 2014, retail spending in Victoria has outperformed the other major Australian states, underpinned by the State’s strong population and economic growth. Over the year to March 2020, retail trade in Victoria grew by 3.4%, however with consumer sentiment collapsing as a result of COVID-19, retail trade is likely to continue to moderate through 2020.

Victoria entered stage three social distancing restrictions in March which has legally enforced a number of retailers to temporarily close. Retail leasing demand is likely to remain low throughout the crisis period, with retailers likely to defer leasing decisions until there is more clarity over the length and extent of the crisis period.

It is currently too early to recognise the impact of the crisis period on retail vacancy as tenants and landlords continue to work through negotiations. The Victorian Government has confirmed the commercial tenancy relief scheme to alleviate financial hardship faced by tenants and landlords as a result of COVID-19.

Online retail trade in Australia continues to gradually take a larger share of overall spending. According to the ABS, in March 2020 online sales made up 7.1% of total retail sales. Over the year to March 2020, Australian online sales grew by 36%, with Australian consumers spending approximately $31 billion online over the 12 months.

Victorian Vs Australian Retail Trade

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