Retail is one of the biggest commercial tenant sectors, providing significant income to private landlords. And while, for the past 20 years, some retail economists have been predicting its bricks and mortar demise it always seems to reinvent itself in one shape or another.

The country’s 27,000 retail stores employing around 220,000 staff turned over about $100 billion last year. About 95% of the stores are single location outfits that employ fewer than 20 staff. Roughly, 14,000 of these are sole traders. At the other end of the spectrum are the 600 or so multi-location retailers employing about 140,000 staff.

However, recent Covid restrictions means the survival of many businesses is on a knife-edge as the country has tipped into a recession with the economy contracting 12.2% in the June quarter – the largest drop since records began in 1987.

Statistics NZ says the GDP fall reflects months spent in lockdown and industries such as retail had significant declines as household domestic spending dropped by 12%.

Demand High

While many retail businesses are struggling, with 13% defaulting on credit payments in the three months to the end of September and others closing, particularly in hospitality, it isn’t deterring so-called “mum and dad” investors keen on buying bite-size – $1 million – investments and demand is far outstripping supply.

Suburban (also known as strip retail) is the most attractive for small investors. Those who are diversifying their residential portfolios to include some commercial real estate, others who are selling their residential assets completely because of recent tax changes, and other Government legislation and Reserve Bank rules to cool the rampant housing market.

“However, investors, who already own small retail stores, are not selling and consequently there is not much on the market,” says Chris Beasleigh, Bayleys retail sales and leasing national director.

“CBDs like Auckland are hurting, but the city’s loss is the suburbs’ gain. It’s a big, big shift. If people are working from home they are going to pop down to the local cafe to get a coffee or a bite to eat.”

Suburbia Wins

Retail New Zealand chief executive Greg Harford says suburban town centres have been the surprising winners following the move to working from home and flexi-working.

“Suburban centres are seeing a renaissance in benefit and that’s happening across New Zealand.” But Harford says the increase in suburban retailing is not offsetting the losses in central business districts.

Even before Covid-19, town centres’ retail tenant mix was already changing, with less retail, and service-based businesses, such as neighbourhood bars, cosmetic beauty and laser clinics, hearing centres, health and wellness-type operators filling the gaps, says Harford.

Beasleigh says some areas will have too much retail and will be badly affected by lockdowns, but if they are single level shops they can be amalgamated for mixed-use schemes or converted as single units into other types of retail, such as barbers.

“Retail is a fast-moving industry and stores are always being adapted to meet trends, societal changes and environmental factors, be that around locations, the move toward convenient meal solutions or different style shops such as the new metro grocery stores.”

Rents And Yields

Despite the challenge of the past year, Auckland CBD and suburban retail recorded rents and yields as remaining stable.

In direct contrast, Wellington CBD retail is experiencing significant challenges following a substantial drop in foot traffic along the Golden Mile, though it has also been felt in secondary CBD locations. This has seen many retailers close over the past year as they reduce their focus on traditional shops to transition to an online model.

Of the three main cities, Christchurch benefits from a higher proportion of quality retail stock than Wellington or Auckland as a result of rebuild activity, which has contributed to tenant retention. Both prime and secondary retail rents and yields for the garden city are stable.

Desirable Options

Smaller retail premises with medical tenants are seen as desirable by investors along with dairies and liquor outlets, because they are regarded as resilient businesses, even in tough times.

For investors with bigger wallets supermarkets and big box stores are attractive. They mainly carry long leases and have strong national or international tenants, who might anchor a suburban shopping centre or mall. “Supermarkets, in particular, do well during lockdowns but not so well when shopping is back to normal,” says Beasleigh.

“It wasn’t that long ago that investors buying smaller properties with yields below 5% would have been focused on potential capital gains, but with interest rates low, although rising, they are now being sought by people seeking alternatives to term deposits for a longterm income stream.

“Most of the investors in the market for this type of property can either afford to pay cash or have other assets they can use as security for a mortgage. Most on the market are auctioned and plenty of buyers line up hoping to own a retail asset when the hammer falls. Prices may be pushed up a little more with investors being inclined to accept slightly lower yields to secure the properties they want.”

Selection Tips

Beasleigh says selecting a property based on an excellent location, strong demand from a range of potential tenants and good physical condition is better than focusing on a high yield. For a first-time investor, suburban shops have been a traditional preference.

“Choose a space with main-road exposure, a good location and easy accessibility for traffic from all directions. Good parking that is easily visible and accessed from the road is important. Look for long lease terms in place and well-established tenants who are likely to renew their lease at the option.”

Beasleigh says it is important to do extensive due diligence before buying, including checking for competition and the extent of vacancies in the area. If there is a lot of nearby space vacant, there is an elevated risk of future vacancy.

“If there is an anchor tenant that brings customers to the location, such as a large chain store or supermarket, then investigate how long their lease is, if they are solid financially, and whether they have any plans to relocate in the near future. It pays to think outside the square in a highly competitive market place.”

He says although the Covid lockdowns have played havoc with the retail industry and there will be a long recovery period, it will never die as an appealing investment option.