In recent years, owners of shopping centres and other retail property have faced considerable levels of uncertainty around the internet and its impact upon bricks and mortar tenancies and property values.
Indeed, partly because of online sales (which now account for around seven per cent of the overall dollar value of retail trade) along with what until recently were very difficult general trading conditions, sections of the retail property sector are indeed doing it tough.
While rents and large format retail conditions have bolted ahead, those in regional, sub-regional and neighbourhood centres are virtually stagnant. With a total of more than 600,000 square metres of new space set to come online throughout 2016 and 2017 in regional centres alone according to CBRE, an existing subdued market will be further challenged.
Nevertheless, positive signs are emerging. A recovery in retail trading conditions – which has historically been a signal for a rise in rents two years in advance, began in 2014 and continues through to today, albeit with conditions having eased a bit recently. Tenant enquiry levels, according to a Jones Lang LaSalle survey in March, are higher than at any other time on record since the JLL survey began in 2011. Because of this, while Colliers suggests any significant uplift in rental growth will probably not become evident for another 12 to 18 months as a result of supply-side issues, CBRE expects modest albeit restrained levels of growth in regional centres of 1.5 per cent, two per cent and 2.2 per cent over this year and the following two years respectively.
Moreover, the online world is not having as big an impact as was once feared. Whereas industry talk a few years back suggested online sales would account for 12 per cent of all sales by now, recent NAB data put the actual current proportion at seven per cent, and the rate of online growth appears to be slowing.
Moreover, with an expanded range of dining, entertainment, wellness and other options, CBRE Asset Services Pacific national retail director Suzette Lamont says, retail landlords have repositioned and redefined their centres as central places to eat, socialise and work out as well a critical space for community and social interaction.
Whereas newsagents and stores selling books, music and cosmetics were once tenants you couldn't do without, that mantelpiece has now shifted to outlets such as cafés, sushi bars, nail bars and massage centres, Lamont says. Even beyond the food court, at Brisbane’s Gasworks Centre, for example, Lorna Jane offers its own café with wholesome food that matches its brand within its retail store – a gym sits next door.
Within the food and beverage industry as well, the quality has lifted and authentic flavours are now the reality. Relating a recent overseas trip which included Penang – currently the food capital of Asia – Lamont said some of the flavours available were "exactly what I can get at my local centre at Chatswood."
“We no longer have that what I used to call stupid round-eye food being served up in daggy fluorescent-lit shopping centres in the suburbs,” she said. “We have created precincts that talk directly to customers that they want to attract. Within precincts like Chatswood, that’s the Asian market.”
Utilising places between, within and around tenancies is also important. Rather than leaving the experience of dragging children around on a Saturday to buy a washing machine or refrigerator as something to be endured rather than enjoyed, for example, the Armarton HQ Homemaker Centre on Sydney’s North Shore put recently put in a "community library." While there, local residents can swap books or meet up in community groups, while mothers – many of whom crave opportunities for social interaction – are able to sit and chat over coffee as their children are entertained through book clubs and various other activities.
For those who do shop online, shopping centre landlords are trying to define their real estate as a crucial point at which to collect merchandise which has arrived – and hoping they will pick up lipstick, coffee, magazines and the like while they are at it. Rundle Mall in Adelaide, for example, offers half-price 30-minute parking for those using ‘click and collect’ services at the Myer Centre. In a city where commuting via two wheels is popular, meanwhile, the centre offers bicycle fixing and parking services as well as showering facilities, capitalising on a further strategy which revolves around making centres more convenient as a place to visit.
Finally, there is the recent push into local markets by foreign fashion brands. Until recently, they have been principally focused around prime CBD locations, but now they are spreading into larger regional and suburban centres. The newly refurbished Macquarie Centre in Sydney, for example, boasts Forever 21, Gap, H&M, Zara and Uniqlo among others.
These brands, Colliers International head of retail Michael Bate says, offer opportunities for landlords not only in terms of enticing fashion conscious consumers into stores but also in terms of their space requirements.
“One Zara store in Parramatta is 1,500 metres – previously (with normal size requirements of other retailers), that would have been 15 stores at one hundred metres,” Bate said. “So what it (the arrival of foreign retailers) is doing is two things. First, it is creating a point of difference for those landlords in the suburbs who are able to attract these brands, and second, they (landlords) are able to absorb more space in one deal than they previously could in four or five deals.”
Current Market Conditions (by Sub-Market) at a Glance
According to CBRE, current market conditions and the future outlook across the Australian retail landscape by sub-market are as follows:
Regional Shopping Centres
- Outside of Victoria (up five per cent year-on-year) and Queensland (up 2.2 per cent), rental increases are currently constrained across most states as retailers battle low margins and the market continues to absorb high levels of supply additions throughout 2013 and 2014.
- Rents are expected to grow by 1.5 per cent, 1.8 per cent and 2.2 per cent this year and in the following two years respectively notwithstanding strong levels of supply additions as the full impact of an improving trading environment kicks in.
- Yields (currently 5.85 per cent) are expected to compress and reach a cyclical low toward late 2015 and early 2016 before rising again toward late 2016 amid upward pressure associated with rising bond yields.
Sub-Regional Shopping Centres
- More dependent upon the struggling department store sector and more exposed to online trading compared with their regional counterparts, sub-regional shopping centre landlords have only recently been able to arrest contractions in rents following two horrific years in 2013 and 2014.
- Modest growth in rents is expected to resume, albeit with rental growth being severely constrained by a strong development pipeline and a continuation of profitability challenges among tenants.
- Despite this, yields are being compressed as a shortage of stock in the regional category underpins buyer interests in sub-regional and are expected to continue to do so before bottoming out in 2016.
Neighbourhood Shopping Centres
- Rents are currently stable, although high levels of competition from new discount store roll-outs over coming years could see major supermarkets pressure landlords for better lease terms in order to address profit margin pressure.
- As with sub-regional centres, yields (currently 7.35 per cent) have tightened in the past 12 months amid high levels of sales activity associated with a shortage of regional-category stock.
- Unlike their regional and sub-regional counterparts, CBD landlords have been raking in prime net-face rental gains of around 14.6 per cent, 7.1 per cent and 6.8 per cent for super-prime, prime and secondary space over the past 12 months as foreign retailers have poured into the market and generated competition for space with local retailers.
- Further increases are expected in the short-term, with those in the super-prime category expected to surge by 20 per cent and 10 per cent in 2015 in Sydney and Melbourne respectively.
- Modest yield compression is expected to continue before yields bottom out in 2016.
Large Format Retail
- Another market darling, large retail format assets have delivered average rental increases of around five per cent for their landlords over the past year as strong housing markets drove demand for furniture, whitegoods and other products.
- Yields compressed by over 40 basis points over the past 12 months and are expected to continue to do so in the short term.