Rising interest rates and inflation are on the tip of everyone’s tongues in the retail sector at present and, not surprisingly, the level of activity in sales and leasing has slowed considerably since the first rate hike was announced.
Discretionary retailers are expected to take the biggest hit in the coming months so we expect the interest in neighbourhood centres with a strong, non-discretionary flavour to continue to sell for sharp yields.
We are already seeing yields soften considerably on secondary stock with weaker tenant profiles and WALE’s, and investors are back to looking for the ‘value add’ and ‘upside’ in investment stock.
This trend is also evident in yields for medical tenanted assets and service stations, with childcare bucking the trend and smaller, boutique centres in particular still trading at similarly tight yields to six months ago. There has been a renewed interest in service stations however, with investors looking for safe returns in uncertain economic times. This follows the wane in interest due to the influx of electric vehicles, and the popular consensus that as that market grows people will charge their vehicles at home, work or shopping centres.
We do expect yield stability in regional truck stops due to the comparatively softer yields to metropolitan stock, as well the transports industry’s reliance on diesel.
So the consistent trend between retail tenants and investors alike is a flight to quality. Secondary tenancies without foot traffic and exposure are sitting on-market for longer while superior stock is still leasing at very healthy sqm rates.
Quality investments are still in high demand, but investors are more discerning and are pricing in far greater risk for anything that has hairs on it, a sharp contrast to 6 months ago.
