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News release

Sydney

Retail Supply Recedes

While rents stall and the investment market continue to adjust


SYDNEY, 27 April 2009 – Construction in the retail sector remains at high levels, despite fewer commencements over recent quarters due to financing constraints and the generally tougher retail environment, according to the latest Jones Lang LaSalle Research statistics.
 
The figures show that at the end of Q1 2009 there was just over 1.03 million sqm of new retail space under construction, which is around 26% lower than the peak of 1.38 million sqm reached in Q2 2008 but still at an historically high level.
 
“While the size of the total retail supply pipeline is shrinking, it is perhaps surprising to some that there are still projects commencing in the current environment,” said Jones Lang LaSalle Research Director, Leigh Warner.
 
In Q1, seven new projects commenced nationally totalling 53,000 sqm and attracting 61% pre-commitment at the end of the quarter and nine projects completed in the quarter totalling 71,800 sqm and 72% committed.
 
“It remains a difficult development environment and the supply pipeline will continue to contract over 2009 as the high commitment levels necessary to commence a project become increasingly difficult to obtain,” Mr Warner said.
 
By location, 30% of retail supply currently under construction is in Sydney and Melbourne respectively, 16% in South East Queensland and 12% in both Adelaide and Perth. Over the past year, Melbourne, South East Queensland and Canberra’s share of the pipeline has fallen notably, which has been offset by rises in the share of mainly Sydney, but also Adelaide and Perth.
 
The bulky goods sub-market continues to dominate construction and accounts for 30% of all space under construction, but this has fallen from 38% a year ago.
 
“Over the past year there has been a clear shift in the construction pipeline away from building smaller new centres towards extensions to larger regional and CBD centres. In particular, it has been the bulky goods sector that has become much less desirable to developers because the sub-sector is particularly vulnerable to weaker discretionary spending in the current economic downturn,” Mr Warner said.
 
As such, regional centres now account for just under a quarter of the total supply pipeline compared to 18% a year ago, while CBD centres have also increased to account for about 14% of supply.
 
The Q1 statistics released also highlight that retail rents have stalled over recent months, reflecting the uncertainty of the general retail environment.  Slight growth was recorded in average nominal rents in regional centres (0.2%), but  average rents in CBD centres and sub-regional centres were flat over the quarter, while average neighbourhood rents fell moderately (-0.2%). Bulky Goods again is the sector that has felt the full brunt of economic slowdown, and rents fell on average 2.3% across the major markets, with Sydney and South East Queensland experiencing the most significant falls.
 
Jones Lang LaSalle’s National Head of Retail, Tony Doherty said that while nominal rents are largely holding up, owners are keen to work with struggling retailers to maintain higher levels of occupancy and consequently the level of rental incentives offered is rising relatively quickly.
 
However, he warned that requests for rental discounts due to the economic environment that don’t demonstrate hardship would not be well received by owners.
 
“We have had examples of opportunistic retailers requesting across the board rental reductions in their national stores.  Retailers doing this should think twice as owners will only respond to genuine requests to help those retailers struggling in the current economic conditions.
 
“Owners will be asking retailers to ensure they have taken their own initiatives to maintain and grow their store’s turnover,” Mr Doherty said.
 
On the investment side, yields continued their adjustment process and investment volumes remained subdued. Across all sectors, average yields softened by a further 40 to 75 basis points in Q1 and yield spreads continued to widen both within sub-markets and between markets. Since the peak of the market in December 2007, regional centre yields have softened by 100 basis points on average, but at the other end of the spectrum neighbourhood centres have softened by 165 basis points on average and bulky goods centres by 155 basis points.
 
In the quarter there were just 16 major (over $5million) sales recorded totalling $450 million. Seven of the recorded sales were neighbourhood centres, which represents a marked increase in transactions in this sub-sector.
 
Australian Head of Retail Investments for Jones Lang LaSalle, Simon Rooney said, "Clearly, the bulk of the transactional activity is taking place in the $10m to $50m pricing bracket and is being dominated by private investors and the emergence of the property syndicators, given the yield spread.
 
"The ongoing difficulties however, in securing senior debt , high margins and conservative loan to valuation ratios will temper sale turnover.  But recorded sales in the first quarter of 2009 are a positive sign that  activity should gradually improve over the course of this year, as investors take advantage of  softening values for high quality assets, rarely traded  for the bulk of the cycle.
 
"Although the sale of the Golden Grove sub-regional centre in Adelaide in the quarter was the first major retail asset to transact above $100 million since January 2008, investment activity above $50m will continue to be subdued, while the institutional players are essentially out of the market, as debt and equity is very difficult to secure, providing significant opportunities for lowly geared and/or 100% equity investors both domestically & offshore,” Mr Rooney said.