Cooling housing market will not necessarily lower LFR rents.
The outlook for rental growth in the LFR sector is far less bearish than recent market commentary suggests, according to a new radar report by Colliers International.
Colliers have released their paper Large Format Retail: Linking the housing market to LFR, which examines the inverse relationship between mortgage rate movement in the housing market and rental growth in the Large Format Retail (LFR) sector.
The report states that mortgage rates influence the availability of capital flowing into the residential market, which is reflected within the measure of housing churn.
As housing churn picks up, so too do the sale of household goods such as furniture, electronics, whitegoods, hardware items, building materials and garden equipment. In turn, increased household goods sales lead to increased earnings for tenants in this sector, enabling them to expand and pay higher rents.
“The Large Format Retail (LFR) sector has come under an increasing level of scrutiny, as regulatory measures, designed to address medium term risks associated with the domestic housing market are implemented,” said Daniel Lees, Director of Research at Colliers International.
“While a direct relationship between mortgage rates and LFR rents appears to be weak on face value, we can connect the dots through a series of logical relationships (mortgage rates, housing churn, household good sales and LFR rents), that are indeed statistically significant.”
“At first glance, the establishment of such a relationship between mortgage rates and LFR rents paints a subdued outlook for the LFR sector; however, our analysis also demonstrates that the upward movement in mortgage rates required to meaningfully reduce LFR rents is material, and unlikely in the medium term.”
Cameron Henshaw, National Director of Large Format Retail at Colliers International said, “The feedback we are receiving from our Large Format Retail tenants across our asset class has been one of growth and expansion with the majority of our projects seeing solid commitment from typical retail tenants in our sector.
“The Large Format Retail sector is also changing in its direction from a traditional furniture and bedding mix to a more hybrid model including serviced based retail offerings in government services, gymnasiums, children’s play centres, learn to swim schools, pet retailers, baby retailers and sport and recreation uses which have the ability to drive further centre traffic and add to the performance of these centres.”
“Prudent Large Format Retail landlords have identified this and have counter acted these potential risks in the market (albeit in our view far less bearish then that of some commentators) and are diversifying their mix which will make these centres far less reliant on typical LFR uses within this sector.”
“Mortgage rates would need to move meaningfully higher before LFR rents commence a convincing shift lower,” Mr Lees said.
“In fact, our modelling suggests standard mortgage rates (as tracked by the RBA) would need to lift from current levels of 5.2 per cent to above 9 per cent - which appears unlikely, even after factoring in incremental hikes to the RBA cash rate from 1.5 per cent currently to 3.25 per cent by 2025