Are retail properties good investments?

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For property investors seeking stable, long-term growth, retail property ownership might be the perfect fit. Rising interest rates are prompting many investors to seek higher-yielding assets, and commercial properties historically deliver stronger yields and better quality tenants than their residential counterparts.

Although some economists warn that recent rate hikes may lead to sluggish retail sales, Jasmine Robinson, senior economist at ANZ, forecasted retail sales growth of around 6% over the 2007/08 financial year, on the back of exceptional sales growth of 6.6% in the first half of 2007.

"The risk of higher interest rates, petrol prices and uncertainty stemming from increased financial market volatility have the potential to slow the pace of discretionary spending, but on balance, we expect nominal retail sales to continue to expand at an above-trend pace," Robinson said.

The above-average growth in retail sales has fuelled a surge in shop building activity, Robinson said, with a strong pipeline of work ahead.

According to Robinson's Retail Property Update, August 2007, in the12 months to June 2007 shop building approvals were up 17% from the previous year. This level of building activity is expected to edge back in 2008; however Robinson said investors can expect yields to continue trending north.

"Rental growth should continue to be reinforced by a relatively healthy retail sales outlook and low vacancy rates, particularly in CBD areas, and this should support capital value growth," she said.

Market yields

Retail rental yields can "vary enormously between different sub-classes of retail", according to CB Richard Ellis' The Big Picture report - and, as with all types of property, achievable rents will be directly influenced by the property's location.

"Overall, retail rents in the last few years have averaged an encouraging 7%," the report said, "and with turnover growth set to improve, the prospects for higher rent growth will also improve."

Annual total returns for most retail properties are in a tight and attractive band of 17.1-17.8%, which has been driven significantly in recent years by strong competition in the investment market, according to the IPD Investment Performance Index (June 2007).

These high yields, coupled with the sector's growth and stability, make retail property an attractive proposition to all types of investors, big and small. With the underlying fundamentals sound, The Big Picture forecasts that retail real estate will remain a popular property investment choice.

For the complete article and more, read the latest issue of Your Investment Property magazine, on sale now.


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