With no apparent sign of any slowing down of the entry of foreign retailers and only limited volumes of new stock set to come onto the market, the current boom within the CBD segment of the retail property market appears set to continue over the near term.
Even as landlords in regional and neighbourhood shopping centre markets have been forced to endure stagnant operating conditions, those in CBD locations have been able to milk significant rental increases as foreign tenants such as H&M, Uniqlo (Japan fast retailing), Forever 21 and Sephora have entered markets across Sydney, Melbourne and Brisbane.
Indeed, as at December last year, 37 of the world’s top 250 retailers had operations within Australia, according to a Deloitte report - up from 30 in the previous year.
Because of this, whereas landlords in regional, sub-regional and neighbourhood shopping centres have been able to eke out minimal levels of rental growth at best in the former case and have battled even to hold rents steady in the latter two cases, those in super prime, prime and secondary CBD locations have banked rises of 11, eight and six per cent. New arrivals have pushed vacancy levels in Sydney and Melbourne down to 1.1 per cent and 1.7 per cent as at December last year respectively.
Going forward, momentum appears set to continue. With the majority of fast-fashion retailers having now secured space, real-estate services firm CBRE reckons a new wave of premium and luxury retailers are next, with many who have previously relied on distribution arrangements within domestic retail outlets or department stores now withdrawing from such arrangements in favour of opening their own stores. A lower Australian dollar will help.
What’s more, whereas high levels of additions are set to challenge other market segments, CBD markets are anticipating just 80,000 square metres of space over the next three years – barely more than the volume of space which was added last year alone.
Moreover, underlying shopper demand within CBD and inner urban areas will be further supported in coming years as the boom in CBD apartment building activity brings more residents, who presumably will prefer to shop close to where they live, into inner urban areas.
Add to that an improving retail environment in general – overall retail sales volumes over the six months to April were more than nine per cent above levels seen in the previous corresponding period two years earlier as tumbling interest rates have spurred shoppers to open their wallets – and you have a recipe for extremely favourable operating conditions from a landlord’s perspective.
For this reason, CBRE expects rental growth of 6.5 per cent in 2015 and 3.5 per cent in 2016, though the real estate services outfit foresees conditions easing off over the longer term as stronger retail returns compared with those in the office sector prompt a degree of premises use change as well as a steadily increasing percentage retail component within new mixed-use developments.
In terms of investment, yields have dropped below seven per cent and are expected to tighten further as investor demand exceeds available supply, CBRE reckons.
Conditions within the broader retail market may have been tight in recent years, but landlords within CBDs are grinning and are expected to continue to experience good times.