Domestic Retailers May Be 'Priced Out' Of Prime Retail Locations

Australian retail rents are beginning to rise across the board after a prolonged lag to retail trade.

CBD markets are leading the charge, with CBRE’s Q4 Australia Retail MarketView highlighting 3.7 per cent growth in national rents in 2014, underpinned by a significant 10.7 per cent rental hike in NSW.

Rental growth is also emerging in the regional, sub regional, neighbourhood and large format sectors according to CBRE’s Head of Research, Australia, Stephen McNabb, with regional face rents tipped to grow by 2.6 per cent this year, followed by 2.8 per cent growth in 2016.

“Expectations for rent growth are improving across most parts of the retail sector reflecting the improved trading conditions and sales growth seen in 2014,” Mr McNabb said.

“Retailer profit margins have fallen in the past two quarters due to rising competition and the weakening AUD but are still relatively high after a period of consolidation and cost cutting.

“Retailer business confidence, whilst modest, is improved on the weak levels of 2013. Fundamentals are now more supportive of rental growth and this has driven stronger investor interest in the retail sector.”

Highpoint Shopping CentreForeign Retailers
A key driver of CBD rental growth has been the continued entrance of foreign retailers, which has led to increased demand for prime CBD space.

This was highlighted by the Q4 opening of French luxury cosmetics retailer Sephora

and Uniqlo, both in Sydney’s Pitt Street, and Swedish mid-range fashion retailer COS opening its doors in Elizabeth Street Melbourne.

CBRE National Director, Retail Services, Alistair Palmer 

said, “Foreign retailers remain the headline story in high street retailing as their store rollouts continue to gain momentum.

"Australia’s high consumption per capita relative to other economies, with expectation of further growth, is garnering strong interest from foreign retailers as they reach saturation in their home markets and look abroad for growth opportunities.”

Mr Palmer said the new offshore entrants had vertically integrated supply chains and/or sheer economic of scale at all stages of the supply chain which gave them a competitive advantage in terms of higher gross margins, allowing them to service higher occupancy costs and secure prime CBD locations.

“As a result of this, many domestic retailers are being priced out of prime locations. We expect domestic retailers to either be willing to pay higher rents or relocate to secondary locations.

“Domestic retailers are also repositioning and reinventing themselves to target niches between the mass and high-end luxury markets such as the fast growing ‘affordable luxury’ segment,” Mr Palmer said.

Another 2015 trend is expected to involve more leasing activity from luxury foreign retailers as opposed to fast fashion retailers, who have largely secured their CBD flagship stores.

“A few dozen luxury food and beverage retailers are searching for suitable opportunities in 2015 and beyond,” Mr Palmer said.

Foreign retailers are also increasing targeting regional shopping centres, which will help support rental growth and redevelopment activity in the regional sector.