Should You Invest in Retail Real Estate?

Real estate has long been viewed as a profitable investment avenue, with different property types offering varying return opportunities. While residential properties have their allure, commercial real estate, particularly retail properties, can yield even higher returns.

In this article, we'll explore the reasons why investing in retail property could be a wise decision, the advantages it offers, and the key considerations to keep in mind.

The Appeal of Retail Property Investments

Retail properties are commercial spaces primarily used by businesses that sell goods directly to consumers. This includes retail stores, shopping malls, and other venues where retail trade occurs.

Here are some compelling reasons to consider investing in retail real estate:

High-Income Potential

Retail properties have the ability to generate substantial income due to several unique factors.

Firstly, property owners can pass on many operational costs, such as water, rates, electricity, and waste management, to the tenants. This reduces the landlord's financial burden and boosts overall profitability.

Additionally, commercial leases tend to be longer-term, typically 3-5 years, compared to shorter residential leases. This provides a consistent and predictable income stream. Moreover, these leases often include annual rent increases, further enhancing the income potential.

Diverse Investment Opportunities  

The retail sector offers a wide array of investment prospects. From small retail units to large shopping centres, there are options to suit different investment goals.

With population growth and new residential developments, the demand for retail spaces is also rising. This presents investors with various locations and building types to choose from.

Working with a commercial buyer's agent can help navigate the market and identify promising opportunities.

Aligned Interests

Unlike residential properties, retail investments benefit from aligned interests between tenants and property owners. Business owners are vested in maintaining their establishment's reputation and appearance.

As a result, they are more diligent in caring for the property and ensuring its upkeep. This shared interest contributes to the property's overall value and creates a mutually beneficial relationship.

The Retail Spending Landscape

Despite narratives of declining retail spending, it's important to distinguish between different retail environments. While spending in large malls may be experiencing a downturn, local shopping strips could tell a different story.

Retail properties, depending on their location and nature of services, can often be low-risk investments.

Factors Influencing Retail Property Success

The prosperity of retail properties is influenced by a confluence of factors, including:

- Local demographics and population characteristics

- Median income levels in the area

- Foot and vehicular traffic volume

- The property's physical layout and accessibility

- Density of residential and commercial entities nearby

- The variety and compatibility of tenant businesses

Leasing Dynamics in Retail Centers

Leasing in smaller retail centers often operates on a net basis, where tenants bear some operational costs, aligning with their interest in maintaining their business's presentation. In contrast, larger retail centers might adopt a model where tenants pay a base rent plus a percentage of their annual sales, fostering a diverse tenant mix and enhancing foot traffic.

It's important to note that retail leases are subject to specific legislation, varying across Australian states and territories. Retail leasing acts regulate most retail shop leases. Understanding these Acts is crucial for anyone looking to lease premises for a retail business, as they impose additional obligations on landlords and stipulate costs that cannot be passed on to tenants.

Exploring Various Retail Property Types

There are various retail property investment types to consider:

1. Medical Properties

These cater to unique requirements like additional plumbing and wiring for specialised medical fit-outs. While some seek high consumer exposure in retail spaces, other housing specialist professionals might opt for office locations.

2. Hospitality Businesses

Restaurants, especially those offering takeout, have demonstrated stability amid fluctuating profits. However, factors like seasonality, global events like COVID-19, and fire risks necessitate careful planning and insurance verification.

3. Service Businesses  

Businesses like salons and massage centers require high foot traffic and affordable rent to sustain profitability. The number of skilled staff and fit-out costs also influence their stability and mobility.

4. General Retail Properties

Encompassing a broad spectrum, general retail properties can house supermarkets, bakeries, news agencies, specialty stores, and childcare centers, each presenting unique opportunities and challenges.

Is Retail Property a Good Investment?

Considering the income potential, diverse opportunities, and alignment of interests, retail property can be a viable investment option.

The value of retail properties tends to be less volatile compared to stock market investments, making them a more stable choice. The higher income potential combined with long-term leases contributes to a higher return on investment than residential properties.

However, as with any investment, thorough research and due diligence are essential. Understanding market trends, analysing location-specific factors, and assessing potential risks are crucial steps in determining the viability of a retail property investment.

If you're considering easing the burden, choosing the right property manager can be a transformative step towards maximising your retail investment's potential while providing peace of mind.

To further your education, you can explore our best-selling commercial property investing book or contact our team for personalised advice tailored to your needs.