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News release

Sydney

Retail proves its resilience

Vacancy remains low and continues to support solid returns for retail property


SYDNEY, 9 FEBRUARY 2011 – The Australian retail property market weathered the GFC better than other commercial property sectors and finished 2010 with low levels of vacancy, solid rental growth, stable yields and a supply pipeline that is subdued but steadily picking up, according to Jones Lang LaSalle’s recently released Q4/2010 statistics.
Jones Lang LaSalle’s Director of Retail Research, Leigh Warner said that some of the key trends included:

• Vacancy stabilised across most retail sub-markets over the second half of 2010 and remains low. Average regional centre vacancy at Q4/2010 was just 0.6% nationally, while average sub-regional centre vacancy rose slightly to 2.9%. However, this rise was offset by slight falls in the average CBD centre vacancy rate to 3.0% and neighbourhood centres to 4.4%;

• Retail rental growth picked up through 2010 and all sub-markets have now returned to growth. Specialty store rents in CBD centres, regional centres and sub-regional all grew by around 2.5% on average nationally through 2010, while neighbourhood centre rents grew 2.0% and bulky goods centre rents grew 0.6%;
• There was little movement in yields across all markets in Q4/2010 and yields have now been relatively stable through most of 2010. Regional centre equivalent yield now typically range between 5.25% and 8.25%, sub-regional between 6.5% and 9.00%, CBD centres between 5.50% and 8.50%, neighbourhood centres between 7.00% and 10.00%, and bulky goods centres between 8.00% and 10.50%.
• The retail supply pipeline has passed its trough and is slowly picking up, but conditions remain tough for developers. A total of 40 retail projects were under construction at the end of Q4/2010 totalling 556,800 sqm, which is well below the peak of over 1.4 million sqm under construction in mid-2008, but is now well above the 466,000 sqm under construction at end of 2009.
 
According to Jones Lang LaSalle’s Head of Retail Investments Simon Rooney, “One of the key attractions of prime Australian retail property for investors has been the stability of the sector and its extraordinary ability to deliver strong risk-adjusted returns through the economic cycle.
 
“Retail assets have once again shown superior stability in asset performance through the turbulence of the GFC relative to other asset classes, which has further solidified the sectors reputation for delivering strong and stable returns,” Mr Rooney said.
 
To illustrate this resilience, Jones Lang LaSalle has compared the performance of regional and sub-regional centres leading up to and after the GFC, with the performance of prime office and industrial property in Sydney and Melbourne. Some of the key points of comparison include:

• Median regional centre yields only softened by 93 basis points from peak levels in late-2007 to their trough in late-2009 and are currently 87 basis points above their peak levels. Median sub-regional yields softened 152 basis points peak-to-trough and are now 145 basis points above the peak. By comparison, prime CBD office yields in Sydney and Melbourne softened by around 175 basis points peak-to-trough, while prime Sydney and Melbourne industrial yields softened by 175 to 200 basis points;

• The peak-to-trough movement in regional centre capital values was just -9%, which compares to  -16% for sub-regional centres, between -21% and -23% for prime Sydney and Melbourne CBD office assets and between -20% and -26% for prime Sydney and Melbourne industrial assets. Regional centre assets are now only around 5% below their capital value peak and sub-regional 13% below peak; and

• Annualised total investment returns for regional shopping centres remained positive right through the GFC period and fell to a trough of 1.1% in September 2009. Total returns for sub-regional assets also only reached a trough of -3.3%. In contrast, average total returns for prime office assets nationally reached a trough of -14.3% and prime industrial assets reached -10.6%.
 
“The stability of prime retail centres will certainly remain an attractive proposition for many larger institutional investors that are now focusing on a ‘core’ asset strategy. However, we expect other investors will now be looking to move up the risk curve and look to acquire some smaller retail assets that potentially have more income upside over the medium-term,” said Mr Rooney.