Retail assets in regional NSW have surged in value, reflecting the pandemic rush to regions, and are likely to remain strong over the short term as the movement of people from urban centres is unlikely to unwind quickly, valuation firm Opteon says.
Letting rates that jumped from about $2500 per square metre in the second quarter of 2019 to just over $3800 two years later have pushed yields down from 6.5 per cent to 5.3 per cent over the same period, the valuation firm’s analysis of transaction data shows.
The figures, based on more than 3500 deals in the sub-$5 million price range on the national firm’s books over the two-year period, show the population shift has generally narrowed the spread – or difference in yield – between regional retail assets such as cafes, high street stores and fast-food outlets and their metropolitan equivalent.
“Our overall consumption has not dropped, but where we are consuming geographically – that’s changed,” said Opteon’s ANZ managing director, Scott Chapman.
“If the social trends continue as they have in recent years we don’t see a significant change in those rates. That is going to be hard to turn back off in the short-medium term.”
A number of commercial property auctions give further evidence of the growing appetite of smaller investors for assets – not only retail but in commercial and office sectors – in regional areas.
This month a Coles Group Liquorland-leased site in Woonona, a northern suburb of Wollongong, sold for $2.51 million on a 3.75 per cent yield at a Burgess Rawson auction. At a separate event, an office suite in Erina on the NSW Central Coast with a new four-year lease sold for $1.35 million on a 7.78 per cent yield.
The attraction to commercial assets followed residential demand, said Ross Turner, Opteon’s national director for commercial, agribusiness and advisory.
“It’s normally a deferred story. You have residential demand and activity happen first and commercial and retail normally can follow that,” he said.
“When you look at the part of NSW that had the least lockdown, that’s regional NSW, and the retail statistics for regional NSW have been very strong.”
Retail in other regional areas is not so strong. Despite a $3 million renovation completed in 2019 that won the country’s top award for heritage architecture this month, the Bendigo Former Mining Exchange that has 1415 square metres of new commercial space intended for bars and restaurants remains empty.
Opteon’s figures showed industrial property also performed well for investors over the two-year period – with NSW also leading other states – and it was questionable how long that performance would continue, the company said in its report.
“There are always potential risks … and the question is raised, at historical low cap rate levels, in an asset class where rental growth is more closely aligned to CPI growth rather than other metrics, does the asset class provide the best value moving into 2022?”
Across the eastern states, smaller office properties in the sub-$10 million price range were also holding up in value, although leasing rates had started falling in Melbourne, having come down to a median $5600 per square metre from a high of $6000 at the end of 2020.
The sector could be at risk if it took longer for the economy to open up in a COVID-normal environment, Opteon warned.
“[A] key factor, particularly in the global employment hubs of Sydney and Melbourne, will be the nature of work practices under COVID-normal’ arrangements,” the company said.
“It is possible that full-time working from home arrangements are a cyclical change and a recovery will follow. However, we can expect lag effects for up to 24 months if investor resilience and tenant confidence erode despite the relative robustness of the Australian economy.”
This article is from Australian Financial Review, please click the following link for the original article: https://www.afr.com/property/commercial/regional-retail-assets-ride-the-pandemic-rush-20211117-p599oj