Retail shops garner stepped-up buyer interest as property investors broaden their horizons

More property investors are taking a close look at investing in retail shops in Melbourne’s inner and middle-ring suburbs.

The uptick in retail investing activity is in part being driven by the introduction of stricter residential tenancy regulations in Victoria, which is encouraging traditional residential rental providers to broaden their investment horizons.

At the same time, Melbourne is witnessing a post-Covid bounce in the patronage and use of “High Street” shopping strips. Not only are consumers now spending strongly at local shopping strips, but the trend for new apartment developments in many strips is generating more visitation and many new retail and entertainment business opportunities.

Senior Commercial Real Estate Agent with Nelson Alexander, Damien Theisz, recently transacted the sale of a number of retail shops in Melbourne on behalf of vendors.

These include a dual retail and residential building on 214 square metres at 51 and 51A Smith Street, Fitzroy. The freehold property sold for $2 million in September after a successful marketing campaign.

Other recent freehold shop sales by Nelson Alexander include single-shop strip properties in Reservoir, Kew East, Pascoe Vale, Oak Park and Camberwell.

“Nelson Alexander has a fair share of the retail commercial real estate market in Fitzroy, Collingwood and surrounding areas,” Mr Theisz says. “But we also have 15 offices across Melbourne, so we get business from those locations as well.”

The trend for new apartment developments in established shopping areas has intensified since 2015. And it’s not just inner-city suburbs like Fitzroy, Carlton and Brunswick that are attracting new-build apartment blocks. They’re also being built in many middle-ring areas, from Camberwell Junction and Kew Junction to Preston and Pascoe Vale.

Mr Theisz says apartment developments normally have at least one or two retail spaces at the base of the new building.

“These spaces typically attract a café operator or other similar businesses,” he notes. “The new developments are certainly bringing different consumer traffic to some of the main street locations, which is good for the greater area.

“We are getting a lot of investors showing interest in retail shops as a result of the new compliance standards in the residential property market flowing from Victoria’s Residential Tenancies Act.

“Some traditional residential property investors are shying away from residential and looking at commercial, which can be a bit more attractive.”

Commercial property is often characterised as a more complex market than houses and apartments. But for astute investors, this sector can offer lucrative upsides such as a higher return on investment and very stable tenants on leases that can run for five years or more.

As a general rule, it is best to choose a well-located, typical version of a property type that appeals to a wide range of buyers, such as an attractive, bright office suite, a retail investment in a popular shopping location, or a factory/warehouse in a strongly performing and accessible industrial area.

Most new commercial investors will select a property based on a good location, robust demand from a range of potential tenants and superior physical condition.

Close market watchers of the commercial property scene believe there are good opportunities to purchase undervalued retail assets in Melbourne at present.

Alistair Weir, a Director of national valuers group Herron Todd White, says a clear positive for the retail investor has been the resumption of a strong rate of population growth in Australia in the post-Covid era.

Mr Weir says a population increase of around 250,000 people per annum creates the need for 500,000 square metres of new retail accommodation or about two square metres per person.

“This is well above the current levels of supply and highlights that at some point, there will be a catch-up period, particularly if population growth continues at current levels,” he says.

“For retail markets, it is now generally acknowledged that early 2022 was the peak of the investment cycle and that since May 2022, yields and appetite for major retail properties have been diminishing. This has seen a standoff between vendors and purchasers, which is only now starting to loosen as the reality of softer investment yields kicks in.”

Mr Weir says the future direction for retail remains more than ever keenly aligned with future interest rate movements.

According to Mr Theisz, the recent interest rate rises in Australia have meant that some commercial properties are not getting the yields that they once were. Despite this, he says, there is an increased number of first-time investors active in the commercial market at the moment because commercial yields remain well up on the typical yield from a residential investment.

Mr Theisz says it’s common for a 4 per cent to 5 per cent yield to be achieved by a freehold commercial property: “With the strata commercial spaces at the base of the new developments, investors are probably looking at a 5 per cent to 6 per cent yield. In addition, the tenant will generally pay all outgoings. That includes water rates, council rates, building insurance and outgoings for essential safety measures. If it is a retail tenant, then they don’t pay land tax, but they pay all the other outgoings.

“There has been a switch to commercial property by some of the Mum and Dad residential investors. They are looking at commercial where you get a better return. You also get longer leases such as five years with options, and hopefully, you don’t get the headaches that you sometimes get with residential tenants.”

Experts advise prospective commercial real estate buyers to choose a space with main-road exposure and easy accessibility for traffic from all directions. Good parking that is easily visible and accessed from the road can be critical.

Most buyers look for strong lease covenants with long lease terms in place and well-established tenants who are likely to renew their lease at the option. Another important consideration is zoning, including what uses are allowed, and the potential for future development of the property.

If you would like to discuss the commercial property market in greater detail or view current and upcoming listings, please call 03-9419 5511 or contact our Nelson Alexander Commercial office.