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News release


Retail rents still under pressure, but the outlook is improving

AUSTRALIA, 24 OCTOBER 2012 – September quarter figures released by Jones Lang LaSalle show despite the moderate improvement in discretionary retail spending since May, conditions remain difficult for many retailers.

However, the figures show that retail rents in Regional Centres have been stable in all markets throughout 2012 and were unchanged again in Q3/2012.  This largely reflects their resilience and solid tenant base.

Jones Lang LaSalle’s Head of Retail, Property & Asset Management Tony Doherty said, “The key challenge for landlords over the past two to three years has been maintaining high occupancy levels, and in the case of Regional Centres, this has been achieved. The Sub-regional and Neighbourhood Centres that dominate their trade area have also experienced high occupancy levels.
“There is still a strong push from retailers to move into resilient premium quality centres of all sizes in order to maximise their trading potential, and we are seeing the tenant base remain well supported in these centres,” said Mr Doherty.
Sub-regional centres recorded a modest decline in rents in Q3/2012 (-0.3%) on average across the country, with a decline of 0.5% in the 12 months to September 2012.
In the Neighbourhood shopping centre sector, rents on speciality stores remain flat in most markets, while others such as Sydney (-0.75%) have recorded further declines in Q3/2012.
National Retail Analyst Andrew Quillfeldt said, “It is clear some retail businesses have been under considerable pressure in recent years but a number of retailers have announced revised strategies to combat the various challenges the industry is facing. Additionally, the impact of lower interest rates and a modest improvement in discretionary spending will have a positive flow on effect to demand for retail space.
“As the demand for retail space slowly improves, pressure will build in the leasing market because vacancy rates and new supply both remain relatively low across most markets and retail sub-sectors.
“We expect this will result in moderate rental growth returning to the sector from early 2013,” said Mr Quillfeldt.
Mr Doherty said, “The retail environment is still very competitive, and landlords have been committed to investing in existing core assets in order to maintain competitiveness.
“This has resulted in an increase in refurbishment and extension projects, with approximately seven major projects (greater than 20,000 sqm in size) commencing since 2010 across the CBD, Regional and Sub-regional sub-sectors.
“Redevelopment provides the opportunity to change the tenancy mix and in some cases capitalise on the influx of new international retailers. They can add a significant element of differentiation to centres able to secure them,” said Mr Doherty.
Masters Home Improvement and Bunnings hardware stores are a very significant proportion of total supply. These two retailers will account for 50% of new space either already completed or currently under construction and due to complete in 2012. On this basis the pipeline of new supply looks relatively low for 2012 and 2013 and slightly below the trough reached in 2010 (372,300 sqm).
Retail Investment Activity
Australian Head of Retail Investments Simon Rooney said, “Investors continue to look through the short term challenges and we have seen further strength in retail investment activity. Capital is being allocated towards defensive asset classes that offer long term stability and retail property has been a beneficiary of that trend.
“The strong levels of activity recorded so far in 2012 have been driven by a series of large transactions. The main theme this year has been A-REITs recycling capital and selling down half interests in regional centres. There has already been over $3.16 billion worth of transactions so far this year and we expect 2012 will surpass 2011 levels ($3.4 billion), particularly given that the fourth quarter of the year is typically the strongest.
“The high level of investment transactions, combined with an increase in major development activity is a positive endorsement for the retail sector, despite the challenging retail environment and pressure in the leasing market,” said Mr Rooney.
Nineteen retail transactions were recorded in Q3/2012 totalling $525.5 million.
Jones Lang LaSalle’s Q3 research shows the prime (upper) end of the yield range remained stable reflecting the strong competition for high quality assets.
Yields at the secondary (lower) end of the range softened by 25 basis points in some markets and retail sub-sectors. This was driven by the relatively thin buyer pool for opportunistic assets and the reluctance from banks to lend to private investors on assets in this sector of the market.