OVER THE PAST few years now, you would have been foolish to consider retail property as a worthwhile investment. And this has been the case since the global financial crisis – when consumers began tightening their belts.
Anyway, having spent several weeks in Europe, I can report that things are no better over there.
Everywhere you go, you will see 30% to 50% price-reduction signs in shop windows. And unfortunately, most retailers still continue to struggle – apart, perhaps, from food and restaurants.
Therefore, it makes no sense at all when you find local investors prepared to bid up prices at auction – to where the passing yields become as low as 3.5% to 4% per annum.
How do you interpret that?
You would expect this to mean that there is a large rental increase looming. However, if you study the following graph, you will quickly realise that it’s unlikely to happen any time soon.
As you can see, the vacancy rates have risen in every capital city over the past six months. And basically, it’s only the regional areas which appear to be holding up fairly well.
Now that’s not to suggest you rush out and buy retail property in country towns – because, as you’ll appreciate, those retail markets are relatively small. And as such, things can change very quickly.
You need to be cautious
Currently, Australia’s household debt sits at around 190% of annual income – which means it is at a record high. However, if interest rates stay steady at present levels, that should remain manageable.
The recent December trading figures suggest that consumer spending is unlikely to increase in the near future. And that is what will determine your future growth, as a retail investor.
Bottom Line: As a quick and simple guide, you probably shouldn’t consider an investment into retail property until household debt declines to around 150% of annual income. And at that level, you might then enjoy some predictable growth going forward.