Global research details how retail property has outperformed industrial, office and residential in the long term

ON A global basis, retail property appears to be the best-performing commercial property sector in the long term, according to research collated by Investment Property Databank (IPD).

South African and UK retail property investors who are feeling the pressure of the consumer slump can take heart from data that show that retail property has outperformed all property — office, industrial, residential — over the long term.

The research findings were presented at the sixth annual investment conference hosted by IPD and the South African Property Owners’ Association in Cape Town last week. IPD is a global information business, dedicated to the objective measurement of commercial real estate performance. It operates in more than 20 countries including most of Europe, the US, Canada, Australia, New Zealand, Japan and SA.

Belinda Clur, associate director and head of global retail at IPD in the UK, says that over a 21-year period, annualised real total returns for retail outperformed all property by 3% in Australia, and 1,7% in Ireland and Canada.

In the US, Netherlands, Sweden and the UK, the retail sector outperformed all property by 1%, 0,9%, 0,7% and 0,1% respectively.

Over a 13-year period, which makes it possible to bring SA into the mix, South African retail outperformed all property sectors by 2,1% in terms of annualised real total returns.

On the same basis, Ireland, Sweden, Australia and the UK showed retail outperforming all property by 1,7%, 0,8%, 0,5% and 0,3% respectively.

In the US and Netherlands, retail underperformed over 13 years by -0,5% and -0,1% respectively, whereas Canada’s retail property performance was equal to other sectors.

Furthermore, on a year-to-year basis, especially at the “point of a downturn” in the global economy, the retail property sector has proven relatively resilient, according to data that go back long enough to test this.

The most striking example of this is shown by Australia, where from 1990 to 1993 the retail sector displayed nominal annual total returns of 12,8%, 6,9%, 11% and 12,4% in each year respectively, relative to Australia’s all-property performance of 3,2%, -8,6%, -5,2% and -0,3%.

In the UK, the retail sector showed resilience during the 1990s downturn, but was outperformed by the industrial sector. In the case of SA, where data are available only from 1995, retail outperformed and showed the most resilience between 1998 and 2000, when interest rates were high.

Retail is often one of the first property sectors to recover, suggesting a “leading capacity”, Clur says. This may be due to the retail sector being highly leveraged to the consumer. It therefore picks up the initial signals of change within a market relating to consumer confidence and economic perceptions, as indicated by spending patterns.

“From a risk point of view, retail real estate appears to show historic resilience in a downturn and, in the long term, provided it is managed properly” Clur says.

“In shifting capital market conditions”, the retail sector offers the investor a relatively high level of “intrinsic risk diversification”, providing the ability to drive income by strategically responding to “turnover, size and rental ratio analyses to generate an income optimising tenant mix”.

But Jonathan Smith, CE of property strategists Courtwell Consulting, does not agree, saying, “the truth is that in SA we are going to go through a difficult time” in retail .

“The first reason is that we are oversupplied with retail property in the urban areas. We can probably still expand into the rural areas and even periurban areas, but the urban areas are going to find they are oversupplied and therefore vacancy figures are going to rise.

“The second reason is we’ve been very fortunate to achieve good strong rentals in the retail sector over the past three to four years. We are not going to see that same growth in retail rentals in the next three to four years.”

In the meantime, however, building costs are going to increase and retail, as a sector, is “really going to come under a lot of strain”, Smith says.

“ We’ve discovered that vacancies in the retail sector in SA are increasing slightly, but there is still very strong demand for offices, as well as industrial property, where the vacancy levels remain very low,” he says.

David Green, MD of Pace Property Group, says the retail property sector is the “first one” to be hit in a downturn but may well be the “first one to recover”.

But Green says looking at the performance of industrial property, these investments seldom display the same volatility as retail investments. This is largely because industrial property is not subject to turnover rentals, which are performance-related, as retail property is, and the lease profiles tend to be longer in industrial property.

He says in the current market, demand for industrial space remains firm and that, as such, the industrial market is “once again likely to outperform the retail market through this year and next ”.

Article from: www.businessday.co.za