2019 Review / 2020 Outlook - Retail Strip Investments

Posted on 29th January 2020

SMSF investors seek retail strata assets

Self-managed super fund investors looking for income-producing properties have come to the fore of Melbourne’s shopping strip investment market in 2019, adding depth to the pool of buyers heading into the new year.

Fitzroys Director Chris Kombi, said the attraction of secure income in the low interest rate environment has put retail commercial and property assets on the radar of SMSF investors.

He said retirees have been particularly keen on strata-titled retail investments that satisfy the criteria of strong income-producing, securely-leased assets in locations with healthy growth prospects.

“Following recent interest rate cuts taking the cash rate to historic lows, SMSF investors are looking for solid returns and are playing a more prominent role in the Melbourne retail investment market,” Kombi said.

“Market analysts are broadly expecting that any short-term change to interest rates would be downwards, and the Reserve Bank has flagged that interest rates will remain low for some time.

“As a result, we are likely to see a deep pool of investors, from experienced players through to SMSF buyers and first-time entrants looking to secure income-producing investments for some time.”

The increased volume of enquiry has seen a rise in SMSF in particular.

“Strata-titled properties have been a particular focus. They are easier to manage with an owners corporation overseeing maintenance, and present low land tax liabilities that don’t cut into returns.”

The 5% to 5.5% yield from a commercial property investment can be the difference between retirees earning $50,000 per year compared to $20,000 each year from having savings sit in fixed deposits.

“Retirees need income. A lot of people have shares but they can present a riskier strategy. Bricks and mortar can be the safer option,” Kombi said.

“Properties with long-term leases to successful tenants and strong income with fixed annual rental increases present ideal set-and-forget, low maintenance investments.”

Retail strata properties across Melbourne and at a range of price points have been purchased by SMSF buyers throughout 2019 include:

- Shop 1, 572 Swan Street, Richmond for $1.701 million, 6.4%, 5+5+5-year lease to café The Shed returning $110,000pa net plus GST, with fixed annual increases of 4%, located at the entrance of the Botanicca Corporate Park

- Shops 19-20, 190 Jells Road, Wheelers Hill for $2.4 million, 5.2% yield, 10+5+5-year lease to Rokk Ebony returning $125,200 per annum

- 2-6 Copernicus Crescent, Bundoora for $2.6 million, 5.5% yield, 5+5-year lease to Café Vorea returning $143,800pa plus outgoings and GST

- 5 Commercial Road, South Yarra for $1.11 million, 4.3% yield, 4+4+4-year lease to Mister Zen, within the Blocktagon development created as part of the hit TV series The Block in the show’s 2015 season

- 138A Rathdowne Street, Carlton for $810,000, 5.9% yield, 3+3+3-year lease to Carlton Barbers

- 106 Gourlay Road, Caroline Springs for $675,000,6.3%, 5+5-year lease to restaurant Dal Roti Boti returning $42,640pa plus GST, and 110 Gourlay Road for $750,000, 6.8%, 5+5-year lease to Mr Dosa returning $52,810pa plus outgoings and GST

- 3 Linden Tree Way, Cranbourne North for $1.295 million at a 6.3% yield, 7+7-year lease to grocery business Seven Day Fresh

- 21 Linden Tree Way has just sold for $630,000 at a 5.4% yield, 5+5-year lease to Glisten Hair & Beauty

“Melbourne retail properties continue to present compelling investment prospects, a reputation that extends throughout the country, and abroad,” Kombi said.

Blue-chip investments

Fitzroys Division Director – Agency, Mark Talbot, said tight yields of around 4% and below continue to be achieved along Melbourne’s shopping strips, particularly in blue-chip locations such as Church Street, Brighton and High Street, Armadale, as well as the lifestyle hub of Smith Street on the northern fringe of the city.

The NAB bank branch at 35 Church Street, Brighton in the absolute prime section the strip for $6.105 million at a sharp 3.5% yield, following more than 100 enquiries and fierce competition between local, interstate and offshore investors.

“The campaign and sales result reinforced the reputation of Church Street, Brighton as arguably Melbourne’s – and Australia’s – most prized shopping strip,” Talbot said.

In Armadale, the retail building leased to Eternal Bridal at 1123 High Street has sold for $1.945 million, at a 3.29% net yield.

“Investors pursue the prestige of the high-end strip, home to an enviable range of notable designers and retailers and a growing suite of popular hospitality operators, supported by one of Melbourne’s most affluent and prized catchments,” Talbot said.

On the other side of the city, Smith Street demonstrated growth in values throughout the decade, through which the hugely popular lifestyle and hospitality precinct has also become a new commercial development hotspot.

Fitzroys sold 62 Smith Street sold for $2.56 million on a 3.28% yield, a 43% value uplift on Fitzroys’ previous sale in 2013, and the 95-97 Smith Street sold for $4.575 million at 3.4% yield, representing 76% uplift to Fitzroys’ previous sale of the property in 2010.

“Investors and land bankers were attracted to the properties strong future value add and further development potential, given the area’s large number of office and residential developments taking place nearby that will further underpin the strong trading throughout Smith Street and sustain rental growth,” Talbot said.

According to Volume 3 of Fitzroys’ Walk the Strip, Smith Street has a retail vacancy of 2.7%, among the lowest in Melbourne.

“Smith Street is the heartbeat of the generational change seen across Collingwood and Fitzroy that has seen the area evolve into one the most vibrant Melbourne locations, with a world class hospitality and nightlife offering, and a booming commercial office market, making it an unbeatable 24/7 location,” Talbot said.

2020

Kombi said yields generally work hand in hand with interest rates, measured against risk against investment, depending on the asset type. Tight yields, which have become a feature of Melbourne’s shopping strip investments, will remain a feature.

He said there was a low supply of quality retail stock listed through the end of 2018 and in the early part of the first half of 2019, but more stock has come to the market in the second half of the year, since the federal election and banking royal commission.

“Buyers have expressed more confidence given the uncertainty around tax laws has been removed, and banks are gradually willing to lending more, and more often,” Kombi said.

“Buyer interest increased across all parts of the market and Vendors are responding. Should the economic and political climate remain stable, the attraction of retail and commercial property as a strong investment option will endure.”

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