Melbourne Retail Standout, Sydney & Brisbane Falter – 1 Mar 2012

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MELBOURNE CBD’s retail property market is defying weak conditions with super prime rents rising to as high as $8,700 per sqm, underpinned by demand from international and food-based tenants, according to CBRE.

In contrast, retail rents in Sydney fell for the first time since the beginning of 2010, declining by 14% quarter-on-quarter and Brisbane prime rents eased by 2.9% despite a solid level of demand from international retailers.

CBRE latest report shows super prime rents on Melbourne’s Bourke St Mall rose by 2.6% over the second half of last year to range between $6,700 per sqm and $8,700 per sqm underpinned by international demand from tenants such as Swarovski.

CBRE global research and consulting senior research analyst Erin Obliubek said even stronger growth had been recorded in prime and secondary rents, with prime rents along Collins, Elizabeth and Swanston Sts rising by 5.1% and secondary rents surging by 8.4%.

“Although the current economic outlook appears bleak, Melbourne’s CBD retail core has continued to go from strength to strength.

“A lack of supply and underlying demand from international and food based retailers has underpinned rental growth across the core of the CBD and contributed to vacancy rates returning to historic lows,” Obliubek said.

Although the CBD street front vacancy rate increased in the September quarter of 2011 as retailers relocated to the core precinct, CBRE found the majority of this space has now been filled and the overall CBD vacancy rate has reverted to an extremely tight 1.6% – fuelled in part by strong demand from international retailers.

Converse is the latest international retailer to open within Melbourne Central, in its first store launch outside the US.

CBRE retail services associate director Max Cookes said the north end of the CBD in particular has started to benefit from the Emporium development as retailers seek out locations surrounding this project in anticipation of increased pedestrian foot traffic.

“This has been highlighted by vacancy falls along the north end of Elizabeth St and Swanston St. In the December quarter, falls in vacancy were also noted along Flinders Lane and Londsale St,” he added.

Cookes said there has also been a significant amount of retail “churn”, in the fashion category as retailers look to either break lease agreements in order to relocate to either smaller tenancies or superior locations.

He noted that boutique fashion retailers wishing to remain in the CBD have pursued both strategies to lower overall occupancy costs.

Food retailers have also been active, particularly in areas such as Swanston St, with tenants targeting the area between Bourke and Lonsdale St to be near the universities and CBD centres QV and Melbourne Central.

Cookes said food-based tenants has overtaken fashion as the most prevalent category in Melbourne’s laneways during 2011, with food now representing over 32% of total floorspace following lease deals with six new food retailers in the second half (with fashion a close second at 31.6%).

As a result the vacancy rate in the laneways has stabilised at 1.2%, with the vast majority of the city’s iconic laneways and arcades having maintained full occupancy during the period.

Within the CBD shopping centres, the vacancy rate has dropped to 2.2%, with falls in vacancy also noted in Galleria and Australia on Collins, of 6.9% and 3.1% respectively.

On the investment front, yields stablised across the board during the second half of 2011, primarily due to the lack of sales. Only one significant transaction occurred during the period, that being the $88 million sale of The Target Centre on Bourke St to St Kilda Property Investments on an initial yield of 7.2%.

However CBRE City Sales’ Josh Rutman said there has been significant activity at the smaller end of the CBD retail market.

“Overall sentiment from Melbourne CBD owners and active purchasers indicated cautious optimism in relation to both rental and capital growth in 2012,” he added.

Two notable retail transactions in the CBD were 255 Swanston St, which sold for $4,900,000 (sub-4% yield) and 303-305 Elizabeth St which transacted in December for $3,200,000 on a 5% yield.

Melbourne was the only Australian CBD retail market to record rental growth compared to Sydney and Brisbane, which are under pressure.

In Sydney, retail rents fell for the first time since the beginning of 2010, declining by 14% quarter-on-quarter, whilst in Brisbane prime rents eased by 2.9% despite a solid level of demand from international retailers.

The weakening market in Sydney was also highlighted by an increased in incentives which reached their highest level ever of 10.7% for prime properties.

CBRE retail services regional director Joshua Loudoun said trading conditions in Sydney are more challenging as job losses incurred in the financial sector impacted consumer demand and sentiment.

Loudoun said continued demand from international retailers has been the other saving grace for the Australian market, helping to keep vacancy rates low in most major markets.

“The strong Australian dollar, record levels of outbound tourism and the increasing popularity of shopping online or abroad have created tough trading conditions for domestic retailers.

“Domestic retailers are still adjusting to the new competition, particularly in the fast fashion and apparel sectors, and are finding it challenging to compete on price,” he concluded.

Source: Propertyreview.com.au – 1st March 2012

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