Property News

Boom or bust for bulky goods

29 September 2006

Rents in the Melbourne bulky goods market continue to grow, albeit at a lesser rate, and investment levels in the market remain strong as yields continue to tighten. However, as discretionary spending falls the future of the market is not so rosey, according to LandMark White.

The Melbourne bulky goods market grew in popularity in line with the residential housing boom of 2001. From this time and over the subsequent five years, the market has grown in size with numerous homemaker centres opening in metropolitan and regional areas.

These were geared towards the home buyer as a 'one-stop-shop' for furnishing, electrical and whitegoods needs.

According to LandMark White, in this time close to 500,000 sqm of bulky goods supply entered the market along major arterial roads and defunct industrial sites throughout Victoria. The recent downturn of the residential market, fall in home renovation, increased interest rates and increased fuel costs has translated into a lowered level of discretionary spending effecting this segment of the market, according to LandMark White.

As bulky goods retailing is closely aligned to residential housing, the top market growth was witnessed in late 2004, being the peak of the Melbourne residential boom. Rents across bulky goods centres have continued to grow, albeit not at the levels during the peak of late 2003, early 2004.

LandMark White research shows average net face rents are currently $175 per sqm, representing a small increase of 0.57% the last twelve months, far from the 4% plus annual growth recorded during the height of the bulky goods phenomenon.

LandMark White tips rents to continue at this level or compress further until the recovery of the greater residential market. With stock continuing to be added to the market, such as Homemaker Hub in Essendon (32,495 sqm) and the 42,250 sqm Harvey Normal bulky goods centre in Springvale, this will further limit rental growth in the short to medium term.

Despite these waning rental growth levels for the bulky goods market, investment in the sector remains strong. With limited available investment product, there is a growing separation between prime and secondary bulky goods stock, hence the large range of yields achievable. More recently institutional investors have turned to the bulky goods sector as a favourable investment alternative, resulting in further tightening of yields.

At present yields range between 7.00% and 8.50%, with some prime stock achieving yields below this range according to LandMark White. Older showroom type bulky goods space not well located on main arterial roads is a good example of centres at the upper yield range. The indicative yield for bulky goods product is currently at 7.75%, and this low yield is likely to see some further compression given the weight of funds in the market.

Over the 2005/06 financial year there was close to $950 million of turnover recorded across the retail market. Of this, 13.83% (the second largest portion) is due to bulky goods transactions including Warrnambool Homemaker Centre which sold for $42.48 million and Homemaker City Moorabbin for $36.60 million. The results for this period have been skewed due to the large regional centre sale of Highpoint City Shopping Centre for a reported sale price of $621.20 million.

LandMark White believes the future for the bulky goods market is unclear given the forecast fall in retail spending due to the obvious lack of discretionary spending levels given uncertainty surrounding interest rates and petrol prices. Presently these factors have not resulted in a fall in the rentals achievable, however they have dampened rental growth.

According to LandMark White, it is doubtful that strong levels of rental growth will return given these factors and the current slow down in the residential market.

Despite this, investment activity has remained strong and yields have witnessed further tightening. LandMark White believes there is little chance yields will see much more compression, however given the interest by institutional investors, there may be some limited tightening. There may also be greater opportunistic investors entering the market at the higher end of the yield range for secondary type stock for future redevelopment, keeping sales turnover levels high.