Q3 2020 – Melbourne Retail Market

  • Investment activity across the retail sector has limited in 2020, reflecting the challenging retail conditions and is projected to the lowest transactional volume in 10 years;
  • Vacancy rates of both the Melbourne CBD and Melbourne’s prime retail strips have risen to 20-year highs as a result of retailers entering administration, unsustainable operating cost increases and the growth of e-commerce;
  • Victorian retail turnover growth has slowed to the lowest growth rate since 2013 and will likely contract as the impact of the Victorian lockdown further affects spending.

Over the year, annual retail trade grew at the lowest growth rate since 2013 and will likely contract as the influence of the Victorian lockdown further affects spending. With the lockdown having forced many occupiers to permanently close, the vacancy rates of Melbourne’s prime retail strips and Melbourne’s CBD retail market have increased to 20 years.

Sales Volume/Yields

Investment activity in the Victorian retail property sector in 2020 to date is significantly below the 10-year average, impacted by soft purchaser sentiment and challenges facing the retail sector. Over 2020 to date, Urban Property Australia has recorded $565 million in retail property sales, lower than the $900 million transacted over the first nine months of 2019. Although domestic unlisted funds and syndicates have acquired the majority of the volume of Victorian retail property transactions, the share comprised of only four transactions. In contrast, Urban Property Australia research revealed that 82% of transactions sold in 2020 were of retail assets below $30 million, of which private investors dominated acquisitions.

Average Melbourne Retail Yields

Yields have softened for the majority of retail asset types through 2020 affected by both temporary and permanent store closures and uncertainty of the behaviour of consumers post COVID. Yields for Melbourne CBD retail assets have softened the most in the past 12 months, impacted by closure of international borders and the lack of workers in the precinct. In contrast, yields for both large format retail assets and Neighbourhood shopping centres have held relatively steady in the 12 months to September 2020.

Demand

Over the year to August 2020, annual retail trade grew by 0.8%, the lowest growth rate since 2013 and will likely contract as the impact of the Victorian lockdown further affects spending. Although retail trade grew in Victoria over the past year, the variance of the performance of the individual retail sub-sectors highlights the impact of the pandemic lockdown with retail trade for cafes and restaurants 30% lower than levels last year whereas retail trade for household goods has increased by 8.8%. While retail spending in Victoria has outperformed the Australian average for the past five years; over the year to August 2020, retail trade across Australia grew by 4.1%.

Online retail trade in Australia continues to gradually take a larger share of overall spending. According to the ABS, in August 2020 online sales made up 11% of total retail sales. Over the year to August 2020, Australian online sales grew by 88%, with Australian consumers spending approximately $39 billion online over the 12 months.

Victorian Retail Trade by Sector

Retail Strips & CBD Market

Total vacancy of Melbourne’s prime retail strips has risen to all-time highs with around 15% of all shops vacant. The vacancy levels of both Chapel Street, South Yarra and Bridge Road are both higher than 20% for the first time with the precincts impacted by online retail sales and rising rental levels.

Affected by the response to the pandemic, Melbourne’s lockdown has stymied leasing activity through much of 2020 to date. With the lockdown having forced many occupiers to permanently close, looking ahead Urban Property Australia expects that there will be downward pressure on rents which may fall by around 20% in order for landlords to attract different types of occupiers post-pandemic. As a result of falling rents, yields for strip retail assets has also expanded, albeit with little transactional evidence.

Similar to Melbourne’s prime retail strips, Melbourne’s CBD retail vacancy has increased to 5.7%, its highest vacancy rate in 20 years. In the absence of both tourists and the workers, investor and tenant demand for Melbourne CBD retail assets has been muted since the emergence of the pandemic. With many retailers seeking to rationalise networks UPA projects that the Melbourne CBD retail vacancy rate to increase further. Reflecting the rising vacancy rates, Melbourne CBD rents have declined for the first time 10 years. While Melbourne CBD retail transactions have been scarce in 2020 to date, prime yields for Melbourne CBD retail assets have risen to now range between 4.5% and 6.0% with further upward pressure expected in the short term reflecting the challenging retail conditions.

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