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News release

AUSTRALIA

Retail leasing market pressures have increased

Occupancy rates deteriorated over the first half of 2017 as a number of retailers closed operations


​Latest figures from JLL show retail fundamentals remain challenged by softer economic drivers, competitive retail industry and long-term structural headwinds, with the average vacancy rate up 0.7 percentage points in 1H17 to the highest rate since 2009.

JLL's Australian Head of Retail, Property & Asset Management, Tony Doherty said, "Owners of retail assets are very focussed on the long-term themes impacting shopping centre performance, especially technology.

"As traditional retailers rapidly seek new ways of utilising technology to grow and strengthen their business through digital channels – whether that's eCommerce, digital wallets, virtual concierges, personable media, social media engagement or 'click and deliver' services – many landlords are also thinking about technology, and how it will integrate and compliment the physical retail environment in the future. Technology also provides an opportunity for those owners who can adapt and utilise technology to differentiate their centres.

"Landlords have to be responsive to the changing environment and provide the best possible places for people to shop, socialise and dine. A re-development upswing is underway as owners reconfigure and refurbish shopping centres to install technological infrastructure for customer analytics, to provide upgraded and expanded dining precincts and to introduce new brands and services to their centres."

According to JLL Research, project commencements increased in 2Q17 and were relatively high compared with recent quarters. Approximately 146,200 sqm started construction in the three months to June 2017, comprising a range of regional, sub-regional and neighbourhood centres.

Vicinity Centres' development of DFO at Perth Airport (24,000 sqm) was a major contributor, along with the refurbishment and extension of Bonnyrigg Plaza (23,600 sqm), a sub-regional centre in Sydney. Vicinity Centres also commenced construction on the extension of two regional centres, including The Glen in Melbourne (18,900 sqm) which is co-owned with Perron Group and Midland Gate in Perth (14,100 sqm).

JLL's Director of Retail Research, Andrew Quillfeldt said, "Retail vacancy rates were impacted by a number of retailers entering voluntary administration. We've tracked the closure of approximately 763 stores over the 18 months to June 2017.

"There is a cyclical component to the current conditions. Some of the economic factors weighing on retail spending growth at present will eventually fade. The housing market is less of a driver than it was in previous years, wages growth remains subdued and new market entrants are driving competition-led discounting among retailers has kept inflation low or negative.

"We expect rental growth to remain muted in the short-term but the fundamental drivers of strong population growth for a mature economy and employment growth will be supportive over the medium term.

The latest vacancy rates published by JLL for June 2017 show an increase across the country and across shopping centre types. Nationally, the shopping centre average (excluding CBD retail) rose from 2.6% in December 2016 to 3.3% in June 2017. The CBD vacancy rate decreased marginally (from 6.8% to 6.3%) but remains significantly higher than other categories, largely driven by the higher rate in Adelaide and Perth.

Vacancy rates in the regional shopping centre category increased marginally in 1H17 reflecting the impact of redevelopments in this sub-sector. Many centres have either recently been through, or are preparing for redevelopment. Regional shopping centre vacancy rates remain low by comparison to other retail categories.

CBD retail was the only category (on a national basis) to record a decline in the vacancy rate in the first half of 2017 and is representative of the strong leasing fundamentals in CBD locations. The decrease was largely driven by the Sydney CBD, which decreased from 3.9% in December 2016 to 3.3% in June 2017. While CBD retail remains the most robust from a leasing demand perspective, the decrease in the Sydney CBD vacancy rate was also impacted by withdrawals for development, partly offset by disruption caused by construction work on George Street.

By market, Sydney and Melbourne continue to record the lowest vacancy rates, with Adelaide, Perth and Brisbane remaining elevated at above 5%.

"In terms of the outlook, Victoria is well-placed to record stronger retail spending conditions, given the state's strong population growth of 2.4% p.a. On a medium-term view, there is potential for a recovery in retail conditions in Queensland given the upside potential for population growth through stronger interstate migration. Conditions are likely to remain subdued in Western Australia given the ongoing economic adjustment, combined with high retail supply pipeline," Mr Quillfeldt said.