Retail property returns dip in 'watershed' year

Total returns on retail property are averaging around 10% and have dipped slightly over the past six months, according to Colliers International.

The chart below shows that the retail property sector has improved significantly from the GFC slump, but has slipped slightly since peaking in July last year.

"2012 was a watershed year for retail, with the sector undergoing significant structural change: weaker retail sales driven by a shift in the mix of spending, retail price deflation and pressure on retailer margins, challenges posed by the strong Australian dollar, and the continued evolution of online retailing in Australia," says  Nora Farren author of 2012: Retail in the rear view report.

"Up until recently, the performance of retail was supported by the expansion of both domestic and international retailers, which in-turn drove rental growth, centre expansion and development, and sector valuations.

"Nevertheless, over the year to September 2012, retail property actually posted a decline in returns (of 140bps), to record an annual total return of 8.8%, on the back of slowing capital growth.

"While in a low-interest-rate environment, this level of return is satisfactory, super and major regional shopping centres actually experienced a large decline in returns, a result of the negative impacts of weaker discretionary spending.

"This was particularly evident for clothing retailers and department stores.

"While, neighbourhood shopping centres, which are anchored by supermarkets, have been supported by steady growth in food retailing. Income growth for retail remains under pressure with new tenants paying less rent, which is starting to be reflected in valuations. Although, with their relatively higher income yield, neighbourhood centres are expected to outperform larger format centres over the next twelve months," she says.