The report from Colliers International's research analysts in New South Wales, Queensland South Australia, Victoria, and WA, found the rising cost of living and the prevailing economic uncertainty had also hit the investment sector with only 12 shopping centre sales recorded to date in 2008.
However on the back of the resources boom some states are doing much better than others a trend which, according to Colliers International's Australian Director of Commercial Research, Felice Spark, will endure at least in the short term.
"On a state-by-state basis, economic growth varies significantly, with resource rich states having considerable influence on their local economies. The New South Wales and Victorian economies, which rely heavily on domestic demand and financial sector output to drive economic growth, are expected to slow further as a result of high interest rates and the rising cost of living," Ms Spark said.
According to the report the resource rich states of Western Australia (WA), Queensland (Qld) and the Northern Territory (NT) all experienced strong Gross State Product (GSP) growth over the year to 2006-07. Queensland and Western Australia experienced GSP growth of 4.9% and 6.3% respectively compared to 1.8% for New South Wales and 2.7% for Victoria.
Ms Spark said total returns for retail property in the March quarter were 14.0% (down from 14.2% in December 2007), reflecting the lowest quarterly data in over four years. In comparison to other commercial property sectors, total returns for the retail sector were near the bottom at 14.0%, just above industrial at 13.8%, whilst office sector total returns topped the list at 22.7%, Ms Spark said.
She said capital returns for retail shopping centers had also shown a dip, down from 7.7% in December 2007 to 7.4% in the March 2008 quarter.
Development
The report found higher interest rates and the increasing cost of finance had caused some institutional investors to focus on redeveloping/refurbishing existing assets rather than buying new assets.
There is more than $3 billion worth of retail development due for completion in 2008 and 2009, comprising either new developments or extensions in the pipeline. Victoria has the strongest development activity with over $1 billion worth of retail development in the pipeline over the next two years, whilst South Australia has the lowest level at $316 million.
The report said weaker retail demand in the latter half of 2008 was expected to lead to a general slowdown in retail construction activity.
Investment
The report found only 12 shopping centre sales, totaling approximately $400 million, had been recorded in 2008 nationally. It found yields had been on a downward trend since 2003 with CBD retail floor space showing the greatest decline from an average 7.25% in 2003 to a current average of 4.75%, however uncertain economic conditions and tighter retail spending would see yields soften marginally for prime grade assets in the short to medium term.
Colliers International's National Director of Retail Valuation, Stephen Andrew, said the investment market had been subdued nationally during 2008 however things may change over the next six months.
"Expect to see more retail stock go on the market in the second half of the year as highly geared owners offload secondary stock. Things are going to be more competitive in terms of the amount of stock vying for active buyers' interest and this is likely to see upward pressure on yields, " Mr Andrew said.
National Director Retail Agency, Nathan Clark said with the current lack of investor competition and softening yields, now was a very good time to consider retail investment.
"The lack of investor competition in the domestic marketplace combined with the fact that the strength of the Australian dollar is putting off foreign investors, presents a great opportunity for cashed-up high net worth individuals," Mr Clark said.
He said those thinking of selling should act now while stock levels were still tight.
Mr Clark said buyer profile had shifted from institutional investors with around 70% of enquiry now from private buyers and semi-private companies, the majority of whom, were looking for add-value plays where there was either development opportunity or rental upside.
He said Asian investors, who had been reluctant to consider one-off opportunities, had also indicated interest in the case of a value-add opportunity in a portfolio of centres. He said most interest was for assets on the eastern seaboard.