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News release

Sydney

Retail Property Stabilises

Consumer confidence buoys both tenants and investors


SYDNEY, 29 JULY 2009 – Much stronger consumer sentiment over recent months has helped stabilise tenant demand and aided the recovery of investor demand in the retail property market, according to Jones Lang LaSalle who have released their second quarter Research statistics.
 
“We definitely saw an improvement in tenant demand levels in the second quarter relative to a particularly weak start to the year, when there was a distinct lack of confidence in conditions among retailers,” said Jones Lang LaSalle’s National Head of Retail Management, Tony Doherty.
 
“The strong rebound of consumer sentiment back into positive territory that we have seen over the past couple of months is clearly buoying many retailers and I would suggest that the mood of most retailers has shifted from out and out pessimism to a cautious optimism,” said Mr Doherty.
 
Jones Lang LaSalle’s second quarter rental data provides some evidence of a stabilisation in the market, with most sub-sectors recording slightly stronger rental growth in the quarter than in Q1.  Regional centre face rents grew 0.4% on average across the monitored markets in Q2 compared to 0.2% last quarter, average CBD and sub-regional rents grew 0.1% after being unchanged in Q1, while bulky goods rents only fell 0.3% in Q2 compared to a 2.7% slump in Q1. The one exception to this trend was neighbourhood centre rents, which fell 0.3% in Q2 after falling only 0.1% in Q1.
 
“The tighter requirements from banks on retailers obtaining finance has created some delays in concluding leasing deals.  Owners, in some cases, are still required to provide rental incentives to ensure deals are finalised,” said Mr Doherty.
 
The other area of the market where increased optimism is clearly evident in the second quarter was in the investment market.
 
“The second quarter of 2009 witnessed a material increase in transactional activity, with 27 major [over $5 million] retail transactions totalling $530.4 million being recorded, representing an increase of 39% on the corresponding period last year,” said Simon Rooney, Jones Lang LaSalle’s National Head of Retail Investments.
 
“These sales reflect an average transactional size of $19.6 million, which is evidence of the strong level of activity within the $10 million to $40 million pricing bracket, which has been the most active since the peak of the market in mid to late 2007.
 
“Demand for these assets, particularly neighbourhood shopping centres, has been underpinned by the counter cyclical private and syndicate investors, who have been lured by the obvious softening in values and the historically low cost of funds, resulting in cash flow positive returns, which have not been achievable in recent years.
 
“Nevertheless, we are gradually seeing more larger centres transact, which is evident in several sub-regional centres sold in recent months, including Golden Grove Shopping Centre in South Australia for $100 million, Floreat Forum in Perth for $100 million, Ingle Farm Shopping Centre in South Australia for $80.75 million subject to capital raising, and Endeavour Hills Shopping Centre in Victoria for circa $80 million,” said Mr Rooney.
 
A further four sub regional transactions are expected to be announced in coming weeks, totalling over $250 million.
 
“As demonstrated by these recent transactions, the sub regional market is following the neighbourhood sector, in terms of recalibration in value and an increase in transactional activity. Particularly for first tier sub regional assets, it would seem yields have plateaued, with only limited further softening of between 25 to 50 basis points in the prime end of this sector expected to occur over the next 12 months,” said Mr Rooney.
 
While there still have been no regional centres sold over the past year, the first big test of this market will be the upcoming off market sale process of ING Retail Property Fund Australia’s, Lakeside Joondalup Shopping Centre in Western Australia, which was recently valued at an estimated $490 million, being conducted by Simon Rooney.
 
The pace of yield softening also slowed markedly in the second quarter. While average yields softened by 25 to 50 basis points across all centre types in Q1, they were largely unchanged in Q2 across all markets for regional centres, sub-regional centres and bulky goods centres, and softened by less than 25 basis points on average for CBD and neighbourhood centres.
 
While some confidence returned to the market in Q2 and helped stabilise conditions, a rapid recovery should not be expected according to Jones Lang LaSalle Research Director, Leigh Warner.
 
“The economic downturn definitely appears that it will be shallower than expected, but the retail environment will remain subdued over the next 12 months due to rising unemployment and the fading influence of fiscal and monetary policy stimulus,” said Mr Warner.
 
“Historically, retail vacancy has risen in line with unemployment. As such, we anticipate that retail vacancy will keep rising moderately over the next 18 months and this will keep rental growth moderate.
 
“What we are already seeing emerge is much greater divergence in asset performance. Quality assets in all categories with a strong leasing profile and healthy catchments are now starting to significantly out-perform, while those with higher vacancy risk are in many cases suffering falling rents and greater declines in value,” Mr Warner added.
 
Other highlights of the Q2 statistics include:
 
• The supply pipeline continued to retreat, reflecting a challenging development environment in the face of weak pre-commitment demand and ongoing credit constraints. 852,800 sqm remained under construction at the end of Q2 2009, compared to 1.4 million sqm a year ago.

• 103,000 sqm of retail construction projects commenced in Q2, which includes the second stage of extensions to the Robina Town Centre on the Gold Coast (26,000 sqm) and the refurbishment of Westfield Sydney City in the Pitt Street Mall (38,700 sqm). This compares to the completion of 255,900 sqm of retail space in the quarter, including the Gepps X Homemaker Centre in Adelaide (60,000 sqm), which becomes the largest bulky goods centre in Australia.

• Vacancy (measured six-monthly) has risen across all sub-markets over the first half of 2009, but generally remains relatively low:
o Regional centre vacancy (average across all markets) rose from 0.9% in Q4 2008 to 1.3% at the end of Q2;
o Average sub-regional vacancy rose from 2.8 to 3.4% in Q2;
o Average CBD centre vacancy rose from 2.8 to 4.5% in Q2; and
o Average neighbourhood vacancy rose from 4.3% to 5.3% in Q2.