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Capital growth days ending

THE years of strong capital growth are over for retail property and future returns will be largely dependent on income, according to the latest ten year forecast on the retail property market from BIS Shrapnel.

“Current consumer demand is strong, retailer profitability high and rent and value growth in 2000 should be sound,” the Retail Property Market 2000-2010 study said.

“This environment is masking underlying issues which will generate weaker returns over the longer term.

“Significant capital expenditure will be required and will have a masked impact on returns.

“Capital returns are expected to be negative in real terms,” the study said.

“Nonetheless, retail property is expected to generate reasonable returns over the next ten years.

“Both regional and sub-regional centres are more or less correctly priced and investors have the benefit of low volatility.”

The study estimated that regional shopping centres will return 9 per cent annually.

Report author Maria Lee wrote: “The last three years have witnessed a strong boom in building activity.”

“This additional construction is making the retail environment ever more competitive and, when consumer spending weakens, this fact will become all too apparent.”

Ms Lee said that commencements would decline over the next year and allow the market to absorb some of the excess stock.

“The current boom phase has focused on the expansion and refurbishment of retail centres,” Ms Lee said.

The next phase will see less expansion and more refurbishment – that is, expenditure to retain, rather than increase, income.”

The study said the capital return component – capital growth less capital expenditure – will be minor. In real terms it forecasted negative capital returns over a ten year period.

Ms Lee said retailers faced two key questions – how spending patterns of baby boomers would change as they aged, and how to appeal to the children of this group as they left home.

“Within the space of a few decades, we move from dominance by family households with children to two new major groups with very different spending patterns – the empty nesters and the young childless couples,” Ms Lee said.

“New strategies will be needed.”

The study forecasted returns from regional and sub-regional property would be lower than those from other property sectors.

“Nevertheless, for investors seeking low volatility, on a risk-return basis retail property will perform reasonable well,” the study said.

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