Gradual recovery forecast for retail property

New Zealand’s retail property market is showing early signs of a recovery - with prime premises in particular continuing to attract strong tenant and investment demand, despite continuing sluggish consumer spending.  

Latest research from leading real estate agency Bayleys Research shows that New Zealand’s current economic downturn had accentuated the divide between prime and secondary retail areas. 

Bayleys Research analysts Ian Little and Sarah Davidson said that in most metropolitan and provincial city centres, prime properties had experienced only minor changes in vacancy levels - thereby limiting the impact on rental levels. 

However, Little and Davidson said the research showed that secondary locations and poorer quality buildings had suffered increasing vacancy rates - with consequent downward pressure on rentals in those sectors. 

“This is also being reflected in actual retail premises sales transactions - where a clear distinction is being made by investors between prime retail offerings with strong locations, and leases and lesser quality properties,” Mr Little said.  

“While interest in the latter has dwindled, competition for top tier properties has remained strong and investors have been prepared to continue to accept low yields to secure them. 

“A recent example of this was the auction of seven retail units, mostly occupied by fashion shops, in the Rialto Centre in the heart of Newmarket’s popular retail precinct in Auckland. These attracted fierce bidding, and all sold under the hammer at yields ranging from 5.2 percent to just over 7 percent.” 

Ms Davidson said that in a number of regional centres – including Gisborne and Hawke’s Bay - the rare appearance of vacancies within prime retail areas had provided an opportunity for national brands to gain entry where previously local traders had dominated. 

“The entry of the national brands has again helped to shore up rental values, which has led in some cases to smaller independent traders having to relocate to more affordable locations,” she said.  

The Bayleys Research data reflected that bulk retail property remained in demand - with this sector of the market generally holding up as a result of the majority of occupiers being national or international brands which were better equipped and positioned to ride out a downturn in retail spending than smaller retailers.  

“The expansion of the sector is still unpopular with a number of councils around the country though as they try to balance shopper demand with a desire to maintain vibrancy within traditional city centre retail precincts,” the research report said. 

Bayleys’ data is supported by figures just released by Investment Property Databank (IPD), which produces property performance indices on approximately 20 countries, and works in conjunction with the Property Council of New Zealand. 

Databank’s latest New Zealand total indices show the recovery in commercial and industrial property returns - first identified in the first quarter of 2010 - has been maintained, with continued improvement recorded for the second quarter.  

Driven by income returns at or close to 8 percent and a flattening out in asset values, total returns for the retail sector have continued to build on the positive total returns recorded since the start of the year. 

Returns from retail property investments across New Zealand sat slightly below those achieved from the industrial sector but were well ahead of the office sector in the latest results for the quarter to the end of June.  

This shows the industrial and retail sectors to be leading the recovery of the overall commercial and industrial property investment markets. The 6.2 percent annual total return recorded by retail property in the 12 months to June 2010 was up on the annual 4.6 percent total return achieved in the previous March 2010 quarter, and well ahead of the 3.8 percent posted by the overall market. 

If the trend continues, Bayleys Research expects positive capital growth to be re-established early in 2011.