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News release


Retail development reaching the bottom

Development remains tough, but pipeline is now slowly picking up and new activity is evident in the market

SYDNEY, 18 AUGUST 2010 – Retail construction project completions have slowed to a trickle in 2010, but the number of projects starting is slowly picking up and the total construction pipeline increased slightly for the second consecutive quarter in Q2/2010, according to data recently released by Jones Lang LaSalle Research.
In total, just seven retail construction projects completed nationally in Q2/2010 adding 52,700 sqm, while ten projects commenced in the quarter totalling 97,400 sqm. This increased the total amount of retail space under construction across the country to 590,300 sqm. In comparison, over 1.4 million sqm of retail construction was underway at its peak in mid-2008.
The most significant project commencement in the quarter was Westfield’s commencement of a 30,000 sqm extension of its Belconnen regional shopping centre in Canberra. Westfield previously had its development pipeline on hold, except for several key projects including Westfield City Centre in the Pitt Street Mall, Sydney. The commencement of the Belconnen project represents the resumption of new activity by Westfield.
“There is no doubt that the development environment remains very challenging, particularly for smaller developers, but there is clear evidence that the tide is turning,” according to Jones Lang LaSalle’s National Retail Analyst, Leigh Warner.
“Aside from the gradual pick up in projects starts, there has also been increased activity further down the pipeline. Developers are dusting off extension and refurbishment plans put on hold during the GFC and there were several large projects that received development approval in the quarter.”
“Investors and owners are still very much focused on adding value to existing centres rather than developing new centres. As such, they are looking at core assets in premium locations and consequently the development pipeline is more focused on the CBD and regional centre markets than it has been over recent years.”
Mr Warner said that the development strategy that is emerging is looking through some of the current uncertainty that exists in the retail environment and looking to capitalise on an eventual recovery.
“Retail trade is currently in somewhat of a post-stimulus lull, but the fundamentals underpinning spending are strong. In particular, unemployment remains low and population growth remains strong. We expect retail trade to pick up in the latter part of 2010 and gain momentum through 2011 as consumers grow more confident in their personal employment and wage growth prospects,” Mr Warner said.

Jones Lang LaSalle’s Q2/2010 figures also showed that retail vacancy has largely stabilised over the first six months of 2010. By sub-sector, the average regional centre vacancy rate was unchanged at a very low 0.8%, while the average sub-regional centre vacancy rate was also stable at 2.7%. The average neighbourhood centre vacancy rate fell 0.2% over H1/2010 to 4.6%, but the average CBD centre vacancy rose 0.2% to 3.2% reflecting the impact of new supply in some markets.
The stabilisation of vacancy is reflective of tenant demand for retail property according to Jones Lang LaSalle’s Head of Retail Management, Tony Doherty.
“Demand was recovering steadily earlier in 2010, but the level of tenant demand did back off slightly in the second quarter reflecting slightly weaker consumer sentiment and the impact of a fall in the Australian dollar on some retailers’ margins.”
“Nevertheless, tenant appetite for expansion remains widely disparate. While some are feeling the pinch and winding back plans, there are still some retailers that are expanding rapidly. One very bright spot is demand from international retailers, many of whom are looking to increase their presence in Australia due to lower growth prospects in their home countries,” Mr Doherty said.
On the investment side, Jones Lang LaSalle’s figures show that retail yields have largely stabilised over the past few quarters in all retail sub-markets, while transaction activity has been strong over recent months. In total, 47 assets totalling AUD 2.05 billion have changed hands over the first six months of the year. This compares to AUD 2.49 billion of transactions over all of 2009.  
Simon Rooney, Head of Retail Investments Australia, said, “The recovery in retail sales volumes in the first half of 2010 largely reflects much stronger sentiment and buyer depth at the larger end of the investment market.
“The re-capitalisation of A-REITs and the rebalancing of fund mangers’ portfolios have resulted in many local buyers returning to the market, with significant capital now looking for placement in counter cyclical and quality opportunities.
“Offshore investors have also remained interested in Australia due to its strong economic growth prospects, relative to other developed countries, combined with our highly transparent real estate markets.
“This increased buyer depth and a stabilisation of yields over recent quarters has given owners the confidence to test the market for bigger assets. The sale of the entire ING Retail Property Fund portfolio for a reported $1.4 billion in H1/2010 is a testament that there are now numerous major players back in the market,” said Mr Rooney.