The Valuers' View - Retail Property

March, 2021

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The Valuers’ View

To assist lenders, investors and owners, the Valuers at m3property have contributed their opinions on the current performance of the property markets and where they expect those markets to head over the short to medium-term.

The survey examines nine property sectors, looking at the key measures of market yields, internal rates of return (IRRs), rents incentives and value. Occupancy rates and average daily room rates were added to the survey for the hotel sector. Indicators including zeros indicate stability was also selected by respondents.

The key themes that will drive the real estate markets in 2021 will be:

  • Economic recovery as restrictions ease and confidence returns

  • Low population growth, but likely to rise as the vaccine rollout continues and borders re-open

  • Record low interest rates

  • Continued focus on Environmental, Social and Governance (ESG) factors when investing and managing portfolios

  • Growth in inflation resulting in rent growth for landlords, where rent increases are linked to inflation

  • The gap between prime and secondary yields is likely to widen

  • Government spending to remain high, despite stimulus starting to reduce

  • ‘Flight to quality’, flexible terms and convenience expected to continue to drive tenant demand

  • Rebound in investor demand due to cashed-up investors, low cost of debt and global interest in strengthening countries with stable property returns

  • Continued investor focus on defensive assets, particularly in sectors with government backing and for properties with long WALEs and minimal need for capital expenditure

  • Despite strengthening residential markets, the official cash rate is likely to remain on hold in the short to medium term due to continuing economic uncertainty, low wages growth and labour markets not being at full capacity. The appearance of an asset price bubble is more likely to be remedied with macro-prudential constraints on lending rather than rising interest rates, which could derail the economic recovery if used too early.

  • If the post-COVID-19 economic recovery does surprise on the upside resulting in asset price bubbles, full employment and rising wages, this would drive up inflation, bond yields and the cash rate. This scenario would represent a risk to the property markets as it could flow through to the cost of capital and yields. That said, the RBA is likely to continue to implement yield curve control to keep bond yields in line with the economic recovery and a strengthening economy would provide stronger cash flows and vacancy would reduce.


Shaun O'Sullivan


View Profile > VIC

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Retail Property

Consumer spending is being driven by increased confidence and boosted household incomes due to lower taxes, stimulus payments, mortgage and rent relief, vouchers, early access to superannuation and a pool of savings built up over COVID-19.

Online retailing continues to increase its share of retail trade resulting in physical stores benefiting less from the increased spending. The retail vacancy rate has risen as groups closed underperforming stores and turned their focus towards online business development. This trend is likely to continue over 2021, resulting in further downward pressure on rents despite the improving retailer revenue.

Retail Results



  • Yield tightening continued for neighbourhood centres due to institutional investors re-entering the market. The strong focus on supermarkets made these assets a defensive play.
  • Due to the high barriers to enter, regional centres rarely come onto the market. There is a reduced pool of capital (equity and debt) seeking regional and sub regional centres in the current market, making it difficult for these centres to transact.


  • Reduced market rental growth projections and increased downtime and tenant incentives have had a tightening impact on IRRs. These trends will continue.

Rents and Incentives

  • Face rents for neighbourhood centres have been stable to date, whereas regional and sub regional centres have seen some rent reductions to reflect decreased trade and reduced tenant demand. There could be further reductions over 2021 due to government stimulus withdrawals over the year. Face rent cuts occurring since the start of the pandemic are considered to re-set tenant Gross Occupancy Costs which have grown at greater levels than tenant turnover in recent years.
  • Incentives for prime neighbourhood centres have been stable; however, we have seen an increase in incentives for some secondary locations and for regional and sub regional centres. Where possible most owners have opted to maintain face rents at previous levels but offer higher incentives.
  • Sub regional Centres, with a high portion of discretionary retailers, large defensive capital requirements and an inferior range of retailers and entertainment offer compared to regional centres, will take longer to recover compared to regional and neighbourhood centres.


  • Value growth is expected to vary widely between centres depending on centre quality, land size, offering, location, demographics and redevelopment potential. Centres that reside on large tracts of metropolitan land with future mixed-use potential will be more favoured.
  • Value levels for neighbourhood centres have been fairly stable, with some reduction for secondary centres due to increased incentives. Strong investor demand is likely to see values remain stable in the short-term.