Melbourne’s neighbourhood, large-format retail assets outperform other subsectors
Investors prefer these assets due to their stable earnings.
According to JLL, new retail developments remain concentrated in Melbourne’s neighbourhood sub-sector, driven by investors’ preference towards stable earnings and longer lease terms.
“One neighbourhood asset completed in 2Q21, adding 6,400 sqm of retail space. In the medium-term supply pipeline, 48% of the projects with the completion dates for 2021-2023 are neighbourhood assets.”
Here’s more from JLL:
The CBD, regional and sub-regional vacancy rate increased by 2.3 percentage points (ppts), 0.4 ppts and 0.4 ppts, respectively, over 1H21. In contrast, the neighbourhood vacancy rate decreased by 1.0 ppts and the large format retail vacancy rate remained stable over 1H21, supported by Victoria’s strong retail spending in food and household goods.
Retail spending improving but still lags the national average
Victorian retail spending grew 3.8% (y-o-y) to May 2021. Retail spending growth was driven by the food (7.8% y-o-y) and household goods (8.3% y-o-y) categories, accounting for 42% and 19%, respectively, of total retail trade. Victoria’s growth in retail trade remains subdued compared to the national average of 9.6% (y-o-y), due to the continued mini-lockdowns.
Discretionary spending is slowly improving, with the clothing, footwear and personal accessories category recording a 4.6% y-o-y decline in May 2021, up from the 27.7% y-o-y decline recorded in February 2021. Similarly, cafés, restaurants and takeaway food spending fell by 11.4% y-o-y in May 2021, which is an improvement from the 32.2% decline recorded in February 2021.
The compression in yields indicate the strong investor appetite
CBD, regional and sub-regional yields remained stable in 2Q21. Neighbourhood and large format retail yields compressed by 25 bps and 38 bps q-o-q, respectively. The compression in yields indicate the strong investor appetite, and the growing demand for non-discretionary anchored centres as the work-from-home arrangements persist and spending habits localise.
Rents declined across the majority of sub-sectors over 2Q21. Continuing the trend since 3Q20, CBD rents have fallen the greatest (-13.3% y-o-y), followed by regional (-7.6% y-o-y), sub-regional (-3.2% y-o-y) and neighbourhood (-1.7% y-o-y) rents. Large format retail rents remained stable, and have done so since 2018.
Outlook: Positive outlook for non-discretionary retail assets to continue
Investor demand for neighbourhood and large format retail assets is likely to continue prevailing in the medium term, after recording a strong quarter of sales transactions, stable or declining vacancy rates and robust supply pipeline. The demand for both sub-sectors is supported by the retail spending habits localising in Victoria with repeated mini-lockdowns, driving people into the suburbs.
There has been evidence for some correction in rents in 2020 and 2021, particularly around discretionary retailers. Neighbourhood and large format retail rents are largely stable now. However, investors still face uncertainty around how deep the structural reset in retail rents will be.
Note: Melbourne Retail refers to Melbourne's overall retail market.