Investing in commercial real estate, particularly retail property, can be more lucrative than the residential market. It can also be much more complicated. Given the current state of the retail industry, to succeed with retail property investment you need to understand what makes a good piece of retail property. That means understanding the fundamentals of retail property, the regional demographics of the area you’re looking to invest in, and what separates a good piece of commercial real estate from a dud.
And we have some tips to help.
Why retail property is a good investment
Before we get into the logistics of picking the perfect retail property, it’s vital you are aware of the benefits of owning retail property so you can weigh these benefits against other potential investments.
- Good first-time investment
A retail property is a solid choice if you’re a first-time investor in commercial property. Since your tenant will be running a business from the property, you are likely to have fewer problems with poor maintenance or behaviour devaluing the property, compared with residential property.
Small-scale retail properties can also be less complex and cheaper to manager than other types of commercial real estate, like commercial office buildings, warehouse space or industrial property. A retail property is, therefore, a great way to learn the basics of being a commercial landlord.
- Comparatively cheap
Compared to the residential market, commercial real estate often has a greater range of prices. This means that you don’t need to invest hundreds of thousands of dollars in a property. Some retail sites sell for less than $100,000 and will still generate good returns.
Smaller scale retail properties are also a good entry point to the commercial real estate market since they are generally cheaper than commercial properties like warehouses and office space.
- Long leases
In the residential market, a typical lease is between six months to a year. However, in the retail space, the minimum lease period is three years, with many leases extending to ten years. Knowing your property will be occupied long term allows for peace of mind and a consistent return on your investment.
Types of retail properties
Understanding the different types of retail property is also hugely important. Prices and yields can vary significantly between these types of properties, as can the regulations, maintenance costs and other factors.
- Shopping centre
A property within a well-established shopping centre means there will be plenty of foot traffic, parking and public transport access. You can also expect plenty of marketing activity from the shopping centre marketing team. As a result, these retail spaces are generally in high demand by retail tenants.
However, shopping centres operate with a strict set of rules that both landlords and retail tenants have to abide by. This will dictate what developments or changes can be made to your property.
In major shopping centre developments (such as Chadstone or Eastland), all properties within the bounds of the centre are owned by the shopping centre (or the company that owns the centre). As a result, you cannot invest directly into these kinds of properties.
- Big-box retail
Big-box retail properties are large-scale warehouse-style real estate. They will be generally be prime real estate occupying a substantial amount of land with substantial on-site car parking. As a result, they we be very expensive to invest in, but will generate a substantial return on investment. Read our blog on The Advantages of Investing in Commercial Real Estate
These properties tend to attract tenants who are heavy-hitters: big box retailers and superstores with lots of stock and a well-established customer base. The premium end of this real estate category will be dominated giant retail conglomerates like Wesfarmers and Woolworths (owners of Bunnings and Dan Murphy’s respectively), since they tend to purchase their retail properties rather than lease them.
- High street
Street or high street properties are any retail sites along a business street. The relatively value of a high street property depends largely on the amount of foot traffic, parking, public transport, surrounding stores and the demographics of the region.
With a high street property, you will generally have more freedom to manage your property than you would in a shopping centre. However, the investment risk will be greater as the attractiveness of the area as a retail destination is subject to change by surrounding developments. For example, changes to road infrastructure or public transport may make the area difficult to access, which could significantly affect foot traffic.
What to look for in a retail site
Now you’re thinking about the kind of site you want to invest in, it’s time to consider the factors that will help to determine demand for the site, as well as yields on your investment.
Parking is a crucial factor in determining how attractive a property is to both shoppers and retail tenants. A property without easily accessible and ample on-site or street parking may not appeal to shoppers, which in turn may not appeal to retail tenants. When looking at a property, it’s vital that you fully assess the surrounding parking situation taking into account the amount of parking, its availability and home much it costs to park there.
- Foot traffic
One of the primary success factors for a retail business is foot traffic. Strong and steady foot traffic is a sign of a healthy and vibrant shopping precinct. Properties with good foot traffic are in higher demand by retailers, which means they generate a higher yield for the investor.
- Strong anchor tenants
Anchor tenants are the major retail brands that operate in the shopping centre, mall, or high street precinct. These are well-known, long-established shopping brands with a loyal, regular customer base. Premier anchor tenants include supermarkets like Coles and Woolworths, department stores like Myer and discount department stores like Target and Kmart.
Having this type of well-known retailer nearby ensures steady foot traffic in the area and will usually indicate steady investment in the surrounding area. Areas with strong anchor tenants usually make for good retail investments.
- Zoning and plans
Before investing in any commercial property, you need to be fully aware of the zoning regulations, as well as any plans to alter or develop the area. Zoning restrictions or regulations may prevent you from developing the property after you purchase it. Any council plans to develop the area could alter the flow of road traffic or foot traffic or affect parking or other factors that could affect your business potential.
- Area demographics
Retail success is often driven by demographics. So, it’s important to understand the general demographics of the area you’re looking at investing in. Average income and discretionary spending habits will affect how regularly and willingly the foot traffic going past your property will support your business by purchasing goods and services. Ideally, you want your property to be in an area where there are wealthy people who willingly spend their money.
Investing in a retail property can be a goldmine. However, discretion should be used when purchasing and managing a property to ensure you are getting the highest yield possible.