Retail Market Outlook & Update

Commercial & Retail Property Market Analysis

Waves of investors seek “pandemic-proof” retail

BY KRISTY KERSWELL

Analysis of retail asset classes reveals that whilst the pandemic has significantly impacted all markets, not all asset classes have been impacted equally, with some benefitting from COVID-19. However, the upcoming cessation of government stimulus will pose a significant challenge to the retail sector as a whole.

Whilst the retail landscape has been significantly impacted by social distancing, customer density mandates and government lockdowns, the market is segmented, and it has become evident that not all asset classes have been impacted equally by the pandemic. There has been a significant overall reduction in the sales volume of retail assets during the pandemic, however despite this, we have witnessed significant spikes in sales of neighbourhood centres and hardware stores throughout 2020 (m3property, 2021). Whilst regional and sub-regional centres have been hit, supermarket anchored neighbourhood and large format centres have fared well. The m3property National Retail Report for 2020 revealed that retail investors showed a preference for major metropolitan centres with high population density, and that there was no demand for regional locations, which often have high levels of competition and major tenant backfill risk. Neighbourhood centres, supermarkets and warehouses have attracted the most investor attention, which is attributed to high amounts of income from non-discretionary, essential retailers (m3property, 2021). The impacts of COVID-19 have led to a divergence in the performance of discretionary and non-discretionary retail assets, and this has become apparent in leasing and sales metrics and investor behaviour.

This points to a recent trend in investor behaviour towards property investments that involve lower levels of risk. As government stimulus begins to draw to a close, retailers are likely to be impacted and vacancy rates are expected to rise in the short to medium term. The most obvious risks to investors are retailers on short-term leases. It is important to note that even despite government stimulus efforts, retail vacancy rates in Australia increased from 4.80% to 6.90% throughout the pandemic. Concerningly, ASIC data suggests that government intervention has caused both personal and business insolvencies to decline below pre-pandemic levels, suggesting that the winding back of measures may result in an opening of the floodgates (ASIC, 2020 & 2021). The question on everyone’s minds is whether government relief measures have successfully avoided the economic impacts of the pandemic, or merely deferred them.

At best, various government support measures have staved off a wave of insolvency and the stimulus efforts have been successful. At worst, we are soon to see the impacts, and business failures and personal insolvencies will dramatically spike in coming months, which will likely wreak havoc on property markets as a whole. To avoid this, the federal government has preemptively implemented further insolvency law reforms that are designed to assist small businesses to restructure their debts in 2021 and coming years (Jones Day, 2021). However, it is unclear whether these measures will be successful.

After the COVID-19 stimulus measures ended on 28 March, this paved the way for evictions and rental increases as landlords have weighed up their options. This has been further complicated by the fact that each tenancy has been impacted differently by the pandemic, leading to rental uncertainty in some market segments. This will likely pose a challenge for investors, and there will be a struggle to find the asst classes that will be most resilient to rises in vacancy rates caused by the end of government stimulus measures. It is likely that investors will adopt a conservative investment approach, avoiding assets with obvious income risks, such as major tenants and discretionary retailers. Finally, the question on everyone’s minds is precisely when the impacts will be felt in commercial markets and whether the expected wave of insolvency will bring about the doom and gloom that pessimistic forecasters predict. The Code of Conduct introduced by the government has been instrumental in saving retail businesses from bankruptcy, but has disadvantaged landlords and has signifi antly impacted cash flows. The end of Job Keeper payments will likely reduce discretionary spending, which will result in placing increased pressure on retailers and posing a risk to their income. Physical retailers lost a signifi ant market share to ecommerce and online retailing during 2020. Landlords are currently facing the challenge of enticing customers back into physical retail locations as restrictions ease. The rise of ecommerce and online retailers admidst COVID may result in the demise of some physical retail locations. This trend has been building over the past few years, and it appears that the pandemic has sped it up signifi antly, making it one of the most salient examples of how COVID has shifted consumer spending patterns. Landlords in regional centres have reported signifi ant leasing spreads, especially in discretionary categories such as fashion and beauty.