High risk accompanies yield in retail investment

Online shopping has become one of the biggest treat to retail strip shopping. However, retail technology (through social media and mobile handsets) has also given the much-needed reboot to the sector in recent times.

Retailers who have survived competition during the past five years have well adapted to the online and offline markets.

Retail is becoming a big business in New Zealand, contributing substantially to our Gross Domestic Product (GDP). According to Reserve Bank of New Zealand, the total volume of domestic retail trade stood at $17.8 billion as at the end of March 2013, compared to $17.02 billion during the corresponding period in 2012.

In Auckland, the retail vacancy rate remains static at about 5%. New market has had the highest retail vacancy rate for over 20 years. However, development of the University of Auckland in the area (at the 5.2 hectares of land of the Lion Breweries) should stimulate activity and push down the vacancy rate in the near future.

Popular sector

Retail investments are one of the most popular investment types and one of my favourites, because of the ability to find alternative tenants for investment to ensure a steady source of income.

For example, if you have a restaurant as a tenant who struggles to meet their rental commitments and decides to vacate, you would have a better chance in replacing the tenant quickly, as the set up cost are high for a restaurant.

The retail sector has its attractions. If you are a keen investor, you could either own your own convenience store or purchase shares in major shopping malls, depending on the funds at your disposal and the level of risk that you would undertake.

You could make a good beginning by purchasing smaller suburban retail shops, with favourable cash flows and lease term to enhance your ability to service a loan. You can also have multiple retail tenants, to spread the risk through a group of shops.

Success factors

Retail is reliant on foot traffic – a factor that you should ensure while investing in a store or a group of shops. The City Council usually has a record of foot traffic in areas coming under its jurisdiction. Higher foot traffic increases the chance of higher business for your retail store, which in turn enhances your turnover and profits. It is advisable to be on the main road, since it would be easier to lease.

The general state of business confidence and economy plays an important part in retail investment. People usually spend more in a booming economy. Public and business confidence levels remain high and rents are paid on time, enabling you to even increase the rent during reviews.

The reveres happen during a downturn as we recently experienced.

Capitalisation Rate

Capitalisation rates for retail are usually between 5% and 8% depending on location.

In Auckland CBD, it could be about 5% for a retail outlet, depending on the lease term and tenant covenant. For example, Queen Street in Auckland CBD and Lambton Quay in Wellington command the highest rentals in the country (between $2000 and $5000 per square metre) depending on foot counts.

If the evolving trends are any indication, the future may see an increasing number of large shopping malls, threatening the viability of smaller retail stores and impacting on the value of the property to owners and investors.

Location is becoming less relevant in today’s competitive retail environment.

However, the opposite could also be true. If an area has not seen growth for some time, you may find a hot spot, which could bring you good returns along with capital gains. Usually the food sector determines success and hence it would be in your interest to look out for areas with fast food outlets.

Yield and risk

Investment in the retail sector offers good returns, but it could also be risky.

The economy is in the recovery mode, and as business confidence rises, it would bring with it gains for the retail sector as a whole, including investors in properties.

Mahesh Ranchhod is a Director of the Ranchhod Group of Companies based in Auckland. Phone: (09) 3031353 Mobile: 021525569

Email: m.ranchhod@xtra.co.nz Website: www.ranchhodgroup.com

The Group incorporates New Zealand and Australian Companies and Trusts designed to invest in commercial properties and manage them in Australia and New Zealand. The above article should be taken only as a guideline and not as specific advice. Mr Ranchhod absolves himself along with the management and staff of Ranchhod Group of Companies and Indian Newslink of any responsibility or liability that may arise from the above article. Readers should seek professional advice before acting upon any information contained above.

The Ranchhod Group is the Sponsor of the ‘Business Excellence in Retail Trade’ Category of the Indian Newslink Indian Business Awards 2013.

Photo :

Location determines value- The Canterbury Arcade in Auckland CBD

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