CHOOSE PANDEMIC-PROOF ASSET

AFR – Saturday, 9 Jan 2021 – Page 25

Last year was incredibly challenging for many retail landlords as shops were forced to close for long periods and retailers sought rental relief or deferred their rent payments under the national code of conduct. Combined with the growth of online shopping, many investors were forced to reassess their exposure to bricks-and-mortar retail.

However, with lockdowns eased, interest rates near zero and consumers returning to suburban malls and retail strips, yield hungry investors have surged back into retail property with a focus on those properties underpinned by long leases to ‘‘ essential services’ ’ tenants – those that stayed open throughout the pandemic and are less exposed to the growth of e-commerce .

Real estate agents Burgess Rawson and Cushman & Wakefield recorded clearance rates above 85 per cent at end-of-year auctions where service stations, fast-food outlets , childcare centres, bank branches, medical-use premises and supermarkets were the most hotly contested properties that sold under the hammer.

Burgess Rawson managing director Ingrid Filmer believes retail property, particularly anything that ‘‘ survived and thrived’ ’ during COVID-19 , remains a standout asset class given the volatility in the sharemarket and low bond rates.

‘‘ Compared to residential investment, retail assets provide better returns with tenants responsible for much more, often including all outgoings [such as rates, taxes and levies] and maintenance,’’ she says.

‘‘ Another key advantage with retail tenants is the ongoing commitment to a site. Retail tenants view a location and property with a long-term lens. They invest heavily in their fit-outs and commit to longer leases. For investors, this means stable returns and ideally, a set-and-forget approach.’’

But investors should be aware that even retail giants such as Chemist Warehouse, Hungry Jack’s and Red Rooster took advantage of the pandemic to temporarily stop paying or reduce rent, highlighting where the power lies in some landlordtenant relationships.

Retail sales specialist and former CBRE agent Rorey James says suburban retail has lifted off the back of people working from home and spending more time locally.

‘‘ This, together with the fact that the CBD and major shopping malls have experienced less foot traffic due to COVID-19 (the drop being absorbed in the suburbs) provides confidence about the future direction of suburban retail strips,’’ James says.

With bank or term deposits providing well below 1 per cent, James says investors are happy to pay up to $5 million for a passive retail investment with a good tenant and accept returns as low as 3 per cent.

‘‘ Returns vary based on location and tenant type but mostly do not exceed 5 per cent at this price point,’’ he says.

‘‘ Capital growth will be interesting to watch given the major drivers over the years have been both rent and the cost of debt.

‘‘ With both of these likely to plateau, capital growth may only come from having more buyers in the market, likely given the increase in investment activity.’’

James suggests looking at the tenant’s background and past performance, how the lease is structured and whether there is upside in the rent.

Avoid buying a property where the rent is ‘‘ above market’ ’ rates as when the tenant’s lease comes up for review (if they can sustain the rent for that period of time), the rent and return may fall.

Returns on strata retail investments tend  to be 100-200 basis points higher than freehold assets, he says, but have less flexibility to add value or develop.

‘‘ Strata is a low-management asset that offers significant land tax shelter to the investor (given the land is shared among many owners). This has seen strata retail assets become far more in demand over the past three to five years,’’ James says. He is confident metropolitan and city fringe markets will be strong performers as people continue to shop locally.

Burgess Rawson’s Filmer, however, believes regional areas offer the ‘‘ best bang for your buck’ ’ including in Victoria, where a 50 per cent stamp duty concession kicked in on January 1.

‘‘ Yields are contracting due to the success of regional areas throughout COVID-19 ,’’ she adds.

‘‘ We expect this to continue as more people move to regional areas for a sea/tree change now that working from home is increasingly popular and residential prices remain affordable.’’