Retail real estate still has the power to deliver value in a digital age.
Total Property - Issue 1 2018
The dramatic shifts in consumer habits, fuelled by globalisation and the rise of online shopping giants such as Amazon, has presented fundamental challenges for the retail sector.
Amazon’s arrival in Australia is expected to accelerate the growth of online shopping in the region and that will undoubtedly influence real estate.
In the last 12 months we’ve seen the closure of several high-profile fashion retailers, including Topshop, Marcs and Andrea Moore, as shoppers take advantage of the discounts and range of stock that online portals can offer.
Retail landlords can’t stop Amazon but they can manage what impact it will have on their investments. The fact that Kiwis’ retail spend was almost $90 billion last year shows we’re still a nation of shoppers at heart. The trick for real estate buyers and their tenants is being attuned to retail trends and engaging with the market.
You can’t afford to be a passive investor in retail – you should be open to reinventing and repositioning your stock and always have a plan B up your sleeve. Those that fail to invest in their properties will fall behind, while those that are willing to spend can future-proof their investments for the next 10 years.
Already, forward-thinking retailers are tapping into this sentiment and developing omni-channel solutions that have bricks and mortar at their heart. Even digital only shops are recognising the value of physical stores, which puts landlords at an advantage.
Unlike many other asset classes, retail can be easy to reposition and find new tenants if the fundamentals of the property are sound. Vacancy for retail in most major New Zealand CBDs is less than one percent and for many buyers right now the challenge is finding stock.
The retail sectors that will show strong growth this year will be ones that are centred around experiences, such as food and beverage and leisure.
Food halls featuring hip restaurants, new food sensations and fast casual outlets will grow in significance. Landlords are fast realising that a well-stocked food hall can attract large numbers of shoppers, particularly millennials, who are keen to spend big on food experiences.
The service sector – represented by hair and beauty salons, barbers and even real estate agencies – will continue to have a valued presence on our high streets and in our shopping centres, while Kiwis’ ingrained desire to “bag a bargain” and the popularity of home renovation shows will keep large format retail in the box seat.
2018 will also be a year of opportunities for the regions.
The “Golden Triangle” linking Auckland, Hamilton and Tauranga is generally considered to be the centre of commercial and industrial property growth in New Zealand. It’s where about 50 percent of the country’s population lives, and its economy is still growing.
All signs indicate that the positive effects of that solidifying growth will extend north, stretching the “Golden Triangle”.
The new Government’s focus on regional development could prove to be a significant catalyst for growth:
• North of Auckland, through to Warkworth and potentially Marsden Point.
• Further along the Eastern Bay of Plenty boundary to include Te Puke with its strong Kiwifruit infrastructure growth, and Rotorua with its strong tourism/visitor numbers; and
• Cambridge as a satellite/commuter township of Hamilton, with its growing sporting tourism sector.
Elsewhere, income performance, returns, and cash-flow will be crucial for those in the commercial and industrial property markets in 2018. Property managers will be under pressure from owners to work assets hard. Finance could also be more difficult to obtain for those with lower equity levels on their portfolio, as the retail banks become more conservative in their lending.
Those owners/investors with approved funding though will be able to make bold moves where others can’t. Meanwhile some of the corporate players are shifting their focus toward more value-add aspects in redeveloping their existing stock, rather than buying new property at a tight price.
New developments of commercial and industrial property will be based around population nodes and transport infrastructure. Existing transport hubs – particularly in Auckland – will be ripe for intensification and redevelopment.
Tighter Government-driven controls on foreign investment in the residential and rural sectors will likely benefit the commercial sector as offshore investors refocus to commercial property opportunities.
Investors who base their decisions on social-analytics will be keeping an eye on the Government’s signalled intention to tighten immigration numbers. This would reduce GDP growth and have an impact on business demand for premises.
Most economists believe the Reserve Bank of New Zealand will lift the Official Cash Rate – currently at a record low of 1.75 percent – but there is some disagreement on when. The prevailing view is that this will be the end of 2018 or beginning of 2019. With the US Federal Reserve lifting its rates at the end of last year, that could influence the Reserve Bank to move earlier.
However, inflation is still low, so any lift by the Reserve Bank of New Zealand will be small so as not to upset the economy.
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