The Future for Retail Investment Property

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OVER THE PAST few years, you will have observed my caution towards purchasing retail property as a worthwhile investment. This is basically been the case since the global financial crisis – when consumers began tightening their belts.

Anyway, having recently returned from three weeks in Europe, I can report that things are no better over there.

Everywhere you go, you will see 30% to 50% price-reduction signs in the shop windows. And unfortunately, most retailers still continue to struggle – apart, perhaps, from food and restaurants.

Therefore, it makes no sense at all when you find local investors prepared to bid up prices at auction – to where the passing yields become as low as 3.5% to 4% per annum.

How do you interpret that?

You would expect this to mean there is a large rental increase looming. However, if you study the following graph, you will quickly realise that’s unlikely to happen any time soon.

As you can see, the vacancy rates have risen in every capital city over the past six months. And basically, it’s only the regional areas which appear to be holding up fairly well.

Now that’s not to suggest you rush out and buy retail property in country towns – because, as you’ll appreciate, those retail markets are individually rather small. And as such, things can change very quickly.

You need to be cautious

Currently, Australia’s household debt sits at around 190% of annual income – which means it is at a record high. However, if interest rates stay steady at present levels, that should remain manageable.

Nonetheless, this effectively means consumer spending is unlikely to increase in the near future. And that is what will determine your future growth, as a retail investor.

Bottom Line: As a quick and simple guide, you probably shouldn’t consider an investment into retail property until household debt declines to around 150% of annual income. And at that level, you might then enjoy some predictable growth going forward.

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