The roller coaster year that has been 2020 has thrown property markets into a state of panic. One of the most impacted sectors is retail shopping centres and with significant media attention on public facing clashes between powerhouse landlords and major retail businesses, the broad brush image has been that all retail property is badly affected. You may have even had thoughts along those lines about retail property Brisbane and South East Queensland. But is it really the case that all retail property is in trouble?
While retailers across the board scrambled in the early months of Covid-19 and particular segments have grappled with different and unique challenges since, there are certain businesses that not only bolstered their trade in those early months, but have continued to thrive ever since. These businesses, both retailers and service providers, are what has been commonly referred to as “essential services”. Despite social distancing restrictions, general fear in the community to get out and about, and various other factors – these essential service businesses are continued to be sought after by their customers. In turn, the properties that house these businesses are being seen as safe havens to investors, so to speak, and rightly so.
We will take a deeper dive into what retail properties make up this category of essential services and other observations that have become clear in the initial fallout of Covid-19.
Traditionally, investors follow the three main principles of lease tenure, location and tenant profile. However, in 2020, there’s been a fourth key principle added to the mix – defensiveness. Investors were introduced to a new rule book with added complexities and challenges, leading to defensive attributes proving most popular.
Demand for non discretionary goods such as liquor, supermarket, pharmacy, fuel, childcare and government investments, is more intense than ever and it has now been demonstrated that there has been little to no COVID-19 related price deterioration in these property aseets that service these sectors. Demand for freehold investments leased to non-discretionary businesses has accelerated over the past 12 months, in particular with private ‘mum and dad’ investors looking for an alternative to the residential market attracted by greater security and long-term returns that commercial property provides.
There has been a clear distinction between properties where tenants have traded through COVID-19 and those that have not. Despite a lot of broad brush negative commentary regarding the retail market, essential service businesses have been well-placed to benefit from community lockdowns. Buyers are aware of this and recognize the ‘defensive’ qualities of these investments.
It seems likely that A-Grade properties such as Bunnings, Woolworths and Coles will continue to enjoy a status akin to a term deposit or bond. The strength of essential service-leased freehold investments pre and post COVID is undeniable. COVID-19 cemented the investor drive as they sought out “defensive” asset classes. It is this demand that has driven a new category of investment – Essential Services.
Due to the introduction of restrictions across the nation, consumers responded with changing buyer behavior and patterns. The “winners” during COVID, supermarkets saw a significant increase in sales, particularly with products deemed ‘essential’, and an increased demand in Australian made products.
*Percentage rent upside
*Prime locations, not easily replaceable or portable
*Strong lease covenants
*Large landholdings with future development potential
Despite a downturn in fuel sales, the underlying lease covenant drives these assets.
*Major land holdings in prime locations
*Identifiable, ASX-listed tenants
*High capital tenant investment
*Reversions and redevelopment opportunities
The childcare industry has enjoyed bipartisan support for many years. The economic return of workforce participation far outweighs the cost to assist in childcare funding. COVID-19 has reiterated the importance Government places on this sector with some of the earliest specialist assistance packages directed to the industry.
*Government funding and bipartisan support
*Strong rental growth
A substantial winner in the consumer post-COVID spending habits research shows that 70 per cent of Australians were drinking more than usual since the COVID-19 outbreak.
*High quality locations near major retail precincts
*Identifiable tenants + Percentage Rent upside
*Increased trading opportunities during COVID
Government funding for telehealth and extra services have provided much needed support, resulting in lower levels of requests for rent assistance.
*High levels of capital investment
*Low portability of tenant.
Branches have widened services to become consumer hubs, adding important one to one customer service.
*Contraction of branches have made remaining branches key to the network, reducing exit risk that was prominent some 5 years ago.
BUNNINGS Lawnton QLD Sale $18,680,000 Lease Term 10 years Yield 4.7%
7-ELEVEN Coomera QLD Sale $5,550,000 Lease Term 12 years Yield 5.2%
GREEN LEAVES (childcare) Ashgrove QLD Sale $4,500,000 Lease Term 15 years Yield 5.1%
ARTISAN CLINIC (medical) Maroochydore QLD Sale $2,700,000 Lease Term 7 years Yield 6.5%
NAPA AUTO (automotive) Slacks Creek QLD Sale $11,700,000 Lease Term 3 years Yield 6.6%
COMMONWEALTH BANK Acacia Ridge Sale $1,401,000 Lease Term 3 years Yield 6.26%
WESTPAC BANK Morayfield Sale $2,620,000 Lease Term 5 years Yield 6.21%
MALT TRADERS (Liquor) BRISBANE CITY SALE $1,104,000 Lease Term 4 years Yield 5.71%
2020 has been a year that noone saw coming with ramifications to every facet of our economy being felt in some way, yet the buoyancy in the commercial property sector at the beginning of the new financial year remains solid. With such an unpredictable pandemic, and no certainty on how it will impact the economy next, it would seem likely that a few key variables will remain unchanged for the short-medium term.
For instance, Government will be fearful of introducing any taxation reform during a global pandemic. Legislative stability remains strong and is most likely to stay that way for the time being. With the gift of hindsight, defensive properties with essential service tenants would be the investment class of choice for a turbulent economic environment like the one we are currently witnessing. Right now, with hits to superannuation and the share market, Australians are seeking the security that ‘bricks and mortar’ provides. The fundamentals of commercial property fit the bill, particularly with essential services investments that have proven dependable during COVID-19.
Over recent years there’s been a trend of the retail property market flight to quality. Despite turbulent times, as we’ve noted – properties with strong fundamentals continue to be highly sought-after. Thus the trend has been amplified in this new post COVID world that we are embarking on. Our principles of property investments have now become four pillars with the addition of ‘defensive’. What has traditionally been a defensive investment, say Government bonds, commodities, currency, has now been redefined. Investors will diversify their portfolios to include defensive investments that can perform in a post-COVID world.
If you are interested in retail property Brisbane and could benefit with some assistance on your side to secure quality properties which are in short supply and are being highly contested – please consider how we can help: