Retail sector looks strong in Melbourne

Investors looking for the next retail property hotspots should keep a close eye on which markets are attracting migrants and growing employment, experts say.

According to Leigh Warner, national retail analyst at Jones Lang LaSalle, Melbourne’s retail property market has outperformed most other parts of the country, as reflected in current retail vacancy rates.

“At the end of 2010, Melbourne had just 0.2% specialty store vacancy in regional centres, 1% vacancy in sub-regional centres and 1.3% in CBD centres, which were all substantially below national averages” Warner told Property Observer.

He says this performance has been “consistent with a robust Victorian economy over the past few years and with particularly strong state population growth”.

According to the Australian Bureau of Statistics, from June 2009 to June 2010 the Victorian population grew by 99,300 people, or 1.8%. Melbourne, which has been the fastest-growing capital city in Australia for nine years running, added 79,000 people, or 80% of the total. In comparison, NSW’s population grew by 105,400, or 1.5%, during the same time period. As of June 2010, Sydney’s population was 4.58 million, with Melbourne rapidly catching up at 4.08 million.

Victoria currently attracts 30% of all migrants into Australia and accounts for 58% of growth in migrant numbers.

The arrival of new migrants has translated into rising building approvals and increased household spending: in the first quarter of 2011 Victoria accounted for 37% of building approvals nationally, and spending on household goods grew by 7.4% in Victoria for the year to March 2011.

Population growth and confidence

Earlier this year CBRE negotiated the sale of the Bundoora Square Shopping Centre in Melbourne for $20.9 million.

 Justin Dowers, who along with Mark Wizel negotiated the sale as part of CBRE’s Victorian retail investments team, says there appears to be a lot more confidence in the Victorian retail market than in other states, “primarily due to economic influences such as the city’s continued population and job growth”.

Dan White from Ray White Invest agrees with this line of thinking

“Australian capitals have similar amounts of retail floor space per capita, so new retail development will be driven by population growth and from changes to city dynamics,” he says.

 Since Melbourne is the fastest-growing city in percentage terms (though not in gross population), White says it will be the most active market in terms of new retail developments.

 Furthermore, he says Melbourne has “probably the best planned urban expansion strategy – planning for and establishing growth corridors and new suburbs – thereby creating the demand for new shopping centres”.

 He also notes the impact of the residential market on retail spending: “Melbourne also has, by quite a margin now, Australia's strongest residential property market, generating household wealth and confidence to support consumer retail spend.”

 As to why people are coming to Melbourne, the respected Economist Intelligence Unit ranks Melbourne as the world’s second most liveable city (behind Vancouver), with strong employment prospects and relatively affordable housing. Sydney managed eighth place.

State market forecast

As in the general economy, the resource-rich states of Western Australian and Queensland have the best retail prospects over the next few years.

 Western Australia

WA is undoubtedly the state hotspot when it comes to retail growth over the next few years. NAB expects the market to rise strongly as business confidence grows in line with the mining bonanza. It is expected to be the top-performing state over the next two years, and the longer-term view is also favourable, with undersupply to be most prevalent in WA over the next three to five years. Capital values are expected to rise by 5.6% cent over the next two years, and rents are predicted to increase by 5% over this time.

 Queensland

Although the Queensland market is currently subdued, the NAB forecast is for “significant gains” over next two years. However, the Queensland CBD retail market and the market for shops that sell bulky goods, such as whitegoods, furniture and automotive parts, are considered the weakest in Australia. Over the next two years, capital values are expected to rise by 1.7% while rents climb by 1.5%.

 NSW/ACT

The outlook is subdued, with NAB reporting declining long-term business expectations. The CBD and regional retail property have the brightest prospects, and bulky goods retailers the gloomiest. Over the next two years, capital values are expected to decline by 0.5% and rental growth by 0.6%. Sydney is the exception, with CBRE forecasting a revival in its prime shopping strips.

Victoria/Tasmania

Outside of Melbourne, the sentiment and outlook is similar to that of NSW/ACT. The CBD is the best place for retail property, following by retail strips. Bulky goods is the poorest sub-sector. A small increase in capital values (1.7%) and rents (1%) is expected over the next two years.

South Australia

According to CBRE, the forecast is for a year of consolidation in Adelaide. Several shopping centre projects are due for completion or to commence construction in 2011, and yields in this sector are forecast to be steady. Yields are also expected to remain steady in the bulky goods sector. Retail rentals in the Adelaide CBD are expected to come under pressure.