Australia’s prime shopping-strip investment market has shown signs of life this new financial year, with local investors snapping up two commercial properties in tightly held Melbourne locations, and all eyes on another as it goes under the hammer next month.
With high interest rates and inflation, and volumes down overall over the last couple of years, the sales reflect growth in the small-investor market, paired with a surge in good buyer’s agents representing those looking for long-term investments and an income stream, said Ray White head of research Vanessa Rader.
“Retail is really interesting at the moment,” she said. “Everyone was writing it off a few years ago – the death of bricks and mortar, that people were going to go online – but it’s certainly turned around.
“It’s around the country, it’s not just a Melbourne story – we’ve certainly seen it in Sydney, and in Queensland as well.”
Rader said the trend hadn’t been seen to the same extent in Western Australia “because there’s a lot of east-coast buyers who are happy to buy interstate as well, but WA just seems that little bit too far away – though we are definitely seeing more interstate buyers in WA than ever before”.
Buyer’s advocate Scott O’Neill, the chief executive of Sydney-based Rethink Group, agrees, saying investors are looking all over the country.
“Retail is almost where a lot of first-time investors default to, because they know it, it’s more familiar,” he said. “A lot of people don’t know data centres or industrial warehouses – those more specialist type things.
“It’s all price-pointed too. A retail shop can be $500,000 to $500 million depending on whether you go to the Westfield level.
“It’s a lot of opportunity for a lot of levels of investors, not just the top of the top. Lots of mums and dads are attracted because of this.
“Perth is white-hot; it’s defying logic at the moment,” O’Neill added. “The stock is so tight; the residential market is growing at circa 20 per cent per annum at the moment.
“There’s a wealth effect happening which is spilling over to commercials. It’s a very good time to sell at the moment.”
Brisbane has joined Melbourne and Sydney as hotspots, along with Perth, southern Queensland, Hobart and regional Victoria, he said. “This was definitely not the case when I first started my business 10 years ago.”
A closer look at recent sales
Radar said retail was back in favour after a couple of periods of subdued activity.
“Particularly if an asset is tenanted, it’s in pretty high regard by small investors,” she said, as investors were looking for security.
Last weekend a double-tenanted shop at 626 Burke Road, Camberwell – anchor tenanted by footwear label Frankie4, with Lucky Well Tattslotto at the rear – sold for nearly $1 million above its reserve, buoyed by five bidders. It fetched $5.081 million, with a $3.6 per cent yield.
The 261-square-metre freehold has two new leases for five and six years, It is surrounded by shops including Mecca Cosmetica, Telstra and the Camberwell Fresh Food Market, with a growing commercial office population and council plans for higher-density residential development nearby.
The week before, on the other side of town, four bidders pushed up the sale price of 133 Acland Street, St Kilda, which has been tenanted by the Commonwealth Bank for 50 years, with three and a half years still to go on the lease.
The freehold investment sold for $4.4 million – $300,000 over the reserve, with a 4.9 per cent yield. The owners had held the 460-square-metre block for 26 years.
Being in a hospitality, nightlife and entertainment precinct, Acland Street took a hit during the pandemic but occupancy is on the rise and returning to pre-pandemic levels, according to the Walk the Strip report by commercial agency Fitzroys.
“This show of confidence in the location from a blue-chip tenant reflects the anticipated uplift in trade along Acland Street, in line with the renewal and activation of the surrounds,” said Fitzroy’s Mark Talbot.
Price point and yields are important
The price point is very important, Rader said. “Sub-$5million, or sub-$2million is a really achievable price point for these [mum and dad] investors.”
Yields are also important, with most buyers looking for returns higher than recent sales offered, O’Neill added.
“It’s a yield market,” he said. “It depends on the area. We are doing over 50 properties per month [and] I am seeing the interest looking at 6 per cent yields, and above.
“But there’s been a softening of the yields [in Melbourne] and other parts of the country in the last six months, which has opened markets back up to interstate investors and larger volumes of money.
“With interest rates over 6 per cent, anyone with debt doesn’t want to go and buy a 4 per cent yield. You’ll get the odd cash buyer in those ranges, which is almost a different market. North of 6 per cent and you’re on the money.”
Are all retail strips created equal?
The location of a shopping strip is important, helped by having the right mix of shops, particularly specialist food.
It is very patchy across the country, Rader said. “I can’t say that’s fundamental everywhere … that if you buy a retail strip, you’re going to do well.”
However, those who do their research, know the value of a prime strip, and are happy to renovate for the long-term, do well from the investments.
“Retail shops are long-term holds, which is why the yields are probably a bit sharper than you would expect for the retail market,” Rader added, noting that sub-regional shopping centres were also having their moment in the sun.
“We talk about the small strips, but this year there has also been a lot of sub-regional shopping centres. They’re a shopping centre that might have a Kmart or Big W and a Coles, and a few other specialties, like a nut shop and butcher, which are doing really well too.”
What helped bolster the recent retails sales in Camberwell and St Kilda?
With lifestyle becoming an ever more important feature of any residential development, the commercial real estate around it is now even more critical for its success.
Fitzroys agent Chris James said the Camberwell retail strip occupancy rates had soared recently, bolstered by retailers including a new Country Road flagship store.
“The area has a growing commercial office population and Burke Road has been the beneficiary of medium and high-density development in recent years, which has boosted the established, affluent catchment and underpinned trade,” he said.
Acland Street has been bolstered by the nearby newly developed $540 million premium Saint Moritz Beachfront Residences, with other council invigoration initiatives and a new entertainment venue in the mix.
“There’s been a lot of commentary around Acland Street but the result clearly shows the market is recognising that it’s starting to turn the corner,” said another Fitzroys agent, Mark Talbot.
Generational renewal
Fitzroys director David Bourke said several Melbourne shopping strips were undergoing a “period of generational renewal”.
“Developments on and around the strips are underpinning future trade and rent prospects,” he said.
“We’re seeing investors turn to well-located Melbourne shopping-strip assets with secure leases to quality tenants at a time of share market and residential market volatility.
“From these two auctions alone, we see that there’s about $45 million worth of unsatisfied capital chasing Melbourne strip assets.”
Next month, eyes will be cast to the affluent bayside suburb of Brighton, to see if the shopping strip market trend continues.
Church Street, Brighton, recorded the lowest vacancy of any of Melbourne’s iconic shopping strips, at an ultra-low 1.1 per cent. Its average vacancy rate over the past seven years, at just 1.31 per cent, is well below the Melbourne-wide average of 7.59 per cent, according to Fitzroys’ report.
Leased by Bed, Bath N’ Table for the past 20 years, 48 Church Street, Brighton, will go under the hammer on September 6, with an asking price of $4 million-plus.
It is the first time in nearly 50 years the 155-square-metre property will be sold, with a secure 5+5-year agreement returning $171,600 a year.
“This is undoubtedly one of the best Melbourne shopping-strip investment opportunities of 2024,” Talbot said.
“The property is in the absolute prime of what is widely regarded as Melbourne’s – and perhaps Australia’s – best-performing shopping strip, and is offered with a brand-new, secure lease to an international tenant. It’s the ultimate set-and-forget Melbourne shopping strip investment.”