Retail RFR First Half 2015

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First Half 2015Australia and New Zealand

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Housing market drives retail spending growth 5

Australian market overview 6

New Zealand market overview 12

Our perspective – Retail 16

Retail sector overview

CBD retail 18

Regional centres 22

Sub-regional centres 26

Neighbourhood centres 30

Large format retail 34

Our experience – Retail 38

Contents

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3Retail | Research & Forecast Report | First Half 2015

1 Rowood Road, ProspectLeasing on behalf of Retail Renovators Pty Ltd & Tumisa Pty Ltd

4 A Colliers International publication

Metro OfficeRETAIL

Housing market drives retail spending growthOverall cap rates continue to firm for retail assets, with a significant improvement having occurred over the past 12 months. This has typically been led by higher yielding sectors such as large format retail. Given the significant weight of capital seeking high quality retail assets and the lower total return environment we anticipate further scope for yield compression over 2015. There is potential for further uplift in pricing, particularly for neighbourhood and large format retail centres given yields are still sitting above their cyclical lows. The strong performance of food and household goods retailing have been driving much of the upswing in retail turnover, and has been reflected in the demand and pricing of these assets. By Nora Farren Director | Research [email protected]

Last year was the strongest year for retailers since prior to the GFC. The lift in spending has been driven by low interest rates, rising asset prices and the willingness of consumers to gradually reduce their rate of savings. For the first quarter of 2015 the majority of institutional shopping centre owners have reported improving specialty retail sales growth across their portfolios. However, weaker performance in clothing and particularly department and discount department stores (DDS) will continue to impact on turnover growth. Improving retail spending is starting to flow through to occupancy rates, but the uplift in rents is taking longer to materialise and vacancy outcomes remain mixed across the retail sectors. The extent of rental income growth uplift has been limited and may not become meaningful until later in the upswing cycle – still 12 to 18 months away.

Investors continue to look at ways to maximise value from retail assets. We have seen increased volumes of centres trading with residential development potential. Owners are diversifying their retail centres to include other uses such as apartments, hotels and student accommodation. Limited access to prime retail stock and transactions of scale has seen some Australian investors look offshore for investment opportunities. Institutional investors are also seeking growth through partnerships and third party funds platforms. Overall, demand for retail assets continues to outweigh supply – with both macro and micro drivers are supportive of further cap rate compression across the sector.

Another future driver of growth across the retail sector is development. The number of shopping centres currently under redevelopment, about to commence construction and in the planning phase has increased markedly. The pace of supply is now anticipated to be above long-term average levels over the next few years. Major institutional owners currently have over $10.5 billion worth of retail development in the pipeline, across around 95 projects. The regional shopping centre sector will account for circa $7.8 billion of the forecast supply. As a percentage of total stock by sector, we expect the supply of regional shopping centre floor space to provide additions equivalent to around 10 percent of the existing market over the next three years. Moving forward we expect that supply additions will largely be absorbed by growth in retail sales turnover.

We expect retail sales in 2015 to grow steadily, at similar rates to 2014. Spending will be supported by low interest rates, a lower Australian dollar (meaning less offshore online shopping and travel overseas) low fuel prices and the benefits from a strong housing market underpinning demand for household goods and large format retail, but also for more discretionary spending.


Retail turnover supported by dwelling price growthThe most supportive factor at present for retail sales growth is the strong gains in house prices, as movements in dwelling prices impact spending more than other aspects of household wealth. The most recent retail trade figures from the ABS for the month of March 2015 increased by 0.3 percent and a solid 0.7 percent for real retail sales over the quarter. Annual growth is running at 4.5 percent. Overall the start to the 2015 calendar year has been a positive one for retailers following a relatively soft Christmas period. The cut to the official cash rate in February combined with lower petrol prices has also had a positive impact on household spending. By sector, the current strength in spending is being led by growth in household goods retailing. This has been driven by rising house prices and consolidated by a lift in housing supply and transactions. During the March quarter 2015 the category detail showed a flat result for basic food retail, but strong gains for household goods retail (+2 percent), clothing (+1.6 percent), cafes and restaurants (+1.4 percent) and other retail (+1.3 percent) with a more subdued gain for department stores. The lift in prices was mainly across non-food categories. Economic conditions

are currently being sustained by low interest rates, lower petrol prices and a lower Australian dollar. The decline in the dollar is supporting retail trade growth through a pick-up in tourism and associated spending as evidenced in recent trade growth. The figures from the ABS are broadly consistent with outcomes from institutional retail owners during reporting season, with the strongest growth categories being mobile phones, retail services, general retail and food.

NATIONAL RETAIL TURNOVER (SEASONALLY ADJUSTED)

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Annual 10-Year Ave.

Annu

al (%

) Cha

nge

Current Annual Growth Rate

4.5%

10-Year Average Growth Rate

4.5%

Source: ABS/Colliers Edge

Retail trade growth across the states is reflecting the impact that low interest rates are having on both consumer spending and house price growth. Retailers have enjoyed very buoyant conditions in New South Wales and Victoria, particularly over the second half of 2014. This is in line with strong house price appreciation in Sydney and Melbourne, and is indicative of the correlation between consumer spending and movement’s in house prices. The Sydney market continues to record strong house price gains, with annual growth currently running at 14.5 percent. Since the February rate cut the Sydney and, to a lesser extent, Melbourne housing markets have caught a second wind, which is reflected in the higher rate of capital gain as well as strong auction results. The rate of growth in Perth and Darwin has slowed substantially in line with the wind down of major infrastructure projects associated with the resources sector and the housing market in Canberra has also softened post federal election.

It is also consistent with the growth transition from mining to non-mining states, with retail turnover in Western Australia relatively soft over the past year at 3.4 percent. Annual retail sales growth in New South Wales is currently five percent. Annual state sales growth is also above the national pace in South Australia (+6.2 percent) and Victoria (+4.7 percent). Weaker growth in Western

Australian market overview

MARCH 2015 FOOD RETAILING

CAFES, RESTAURANTS & TAKEAWAY FOOD

OTHER RETAILING

CLOTHING, FOOTWEAR & PERSONAL ACCESSORIES

DEPARTMENT STORES

HOUSEHOLD GOODS

TOTAL RETAIL TURNOVER

Monthly % Change 0.4% -1.1% 0.1% 2.2% 3.8% -1.0% 0.3%

Yearly % Change 4.0% 2.6% 2.2% 6.0% 5.2% 8.0% 4.5%


Summerhill Shopping Centre, Reservoir VicLeasing on behalf of Summerhill Shopping Centre Pty Ltd


Metro OfficeRETAIL

Australia and Queensland (+3.6 percent) reflects the impact that a decline in mining construction related jobs is having on consumer spending. The decline in the Australian dollar may distribute economic benefits more broadly, which could result in more balance retail sales growth across the states over the course of 2015.

Recent months have also brought another boost for retailers in the form of cheaper petrol prices freeing up disposable income which can be directed to other forms of spending. The fall in petrol prices leaves households with more to spend on other goods and services. It is also likely to be supportive of broader consumer sentiment. Consumers are increasing borrowing again and are slowing the rate at which they save. This means spending growth is running ahead of income growth, and the share of spending directed to retailers is rising, resulting in retail spending as a share of household income rising solidly. Also expected to assist retail spending is the sustained low level of the Australian dollar, which has fallen to around US$0.78 cents as at May 2015. This level is supportive of not only attracting more overseas visitors to Australia, but also acts as a disincentive for Australians to take offshore holidays, particularly to the USA. This is expected to benefit domestic retailers as spending leakage to overseas will diminish. While net tourism flow has previously been a major negative, this should reverse. The lower Australian dollar also impacts the price advantages of offshore online retailers, and the amount that Australian’s spend online with international retailers.

The short-term outlook remains positive for retail, supported by low interest rates (a key driver for incomes); a buoyant housing market; declines in household saving rates, and steady population

growth – despite the broader economy growing at a sub-trend pace. While the slowing of the mining investment boom has been expected, the rest of the economy (excluding housing and the equities market) has struggled to fill the gap in growth. Deloitte Access Economics forecast real retail sales growth to be 3.4 percent over the 2014/15 financial year. While consumer confidence will continue to influence spending, the correlation is not as strong as in previous cycles. With interest rates and fuel prices set to remain low over the course of year, 2015 should be another solid year for discretionary retail spending - although the influence from house prices and stronger housing activity may dissipate through the year. With growth in retail turnover a key driver of the performance of retail property, the recovery in spending will begin to flow through to increased demand for retail floor space and occupancy levels, which will in turn support asset values and cap rates. The changing patterns of consumer spending also foreshadow the likely performance across retail property types.

Large format retail benefits from housing marketGrowth in retail spending over the past year has been led by the household goods sector. The latest figures from the ABS show that during the year to March 2015 spending on household goods rose by eight percent - the highest across all retail categories. Within the household goods category, the strongest performer has been hardware, building and garden supplies showing growth of 10.1 percent over the year to March 2015. This was followed by growth in electrical and electronic goods retailing up 8.8 percent; and floorcovering and furniture which grew 4.2 percent. The strong growth across the sector has been driven by rising house prices and consolidated by a lift in housing supply and transactions, and is also reflected in the strong recent performance of hardware retailer Bunnings. Household goods sales volume growth has also been strong, rising 11.3 percent over 2014. This was the strongest annual growth rate for the sector in over ten years. A cyclical upswing in household goods retailing has taken hold on the back of a strong lift in housing construction and low interest rates. While the rate cut by the RBA in May was a further favourable development for this sector, a moderation in sales growth for household goods retailing from its current highs is anticipated over the next 12 months, as house price gains plateau and residential building activity levels out.

Rentals in the large format retail sector have remained stable over the past six months, with select markets starting to see some upside in rents. The pipeline of new supply within the large format sector has been dominated by the hardware category. The construction of large scale homemaker centres has been subdued of late and forecasts suggest this is unlikely to change over the next two years. There has however been a tightening in vacancy and an improvement in leasing demand which is likely to drive some rental growth over the next 12 months. Prime space is likely to see stronger growth than secondary grade space. Incentives remain a feature of the market, but have come

Stockland Townsville, QldSold on behalf of Stockland Trust management


down over the past six months. There is a significant difference between incentives levels in metropolitan and regional areas. The improvement in retail turnover in the household goods category has also improved demand for large format retail. This has seen vacancy rates steadily fall across the sector nationally. Much of the new supply has been focused on single tenant buildings and not new homemaker centres, with most being design and construct projects, meaning they are occupied on completion.

Potential implications of the competition policy review The Competition Policy Review final report was released in March 2015 and it’s broadly consistent with the draft report. It highlights that implementation of the rules will be the critical issue. Known as the Harper Review, it provides a number of recommendations that will apply to retail markets to promote competition and benefit consumers. Competition in retail markets has been an important focus for the Review, including competition in grocery and fuel retailing, regulations on planning, zoning and trading hours, and specific regulations such as those affecting pharmacy and liquor retailing. There are a number of potential implications of the five key recommendations impacting the supermarket industry:

• The effects test in assessing misuse of market power may increase uncertainty around pricing and the legal implications of competitive behaviour;

• The lift in planning and zoning restrictions is likely to benefit Aldi’s expansion into South Australia and Wester Australia, while also benefiting Masters and Bunnings;

• The deregulation of pharmacy licenses would present potential to sell medicines in supermarkets;

• The deregulation of liquor licenses also means potential for alcohol to be sold in supermarkets, and may also enable property consolidation for the major store/brand operators;

• Lifting of retail trading hour restrictions would impact the current trading laws in Western Australia, South Australia and Queensland.

The focus will now turn to how the recommendations are implemented and enforced by regulators, state and federal governments as well as the Senate. The Labor party publicly opposed the effects test following the draft report. Historically, with these types of reviews across other industries that recommend major structural change, in practice very little has been implemented. As a result, the real-world application of these recommendations will remain contentious for some time.

Online shopping tax rejected As the Australian dollar declines we have seen a corresponding moderation in the growth of online retail. According to the NAB Online Retail Sales Index, annual growth for the year to March 2015 is tracking at eight percent. In dollar terms, Australians spent $16.8 billion online in the 12 months to March 2015 – equivalent to 6.9 percent of spending at traditional bricks-and-mortar retailers. While still prolific, recent online growth has been more subdued than the 20 to 30 percent growth rates recorded between 2010 and 2012. A substantial gap now also exists between the stronger growth in domestic online retailing, and the virtual stall in growth in international online sales, which is most likely currency related. Good news for domestic retailers is that they are winning a greater proportion of total online sales revenue, with around 75 percent of online retail sales. This has occurred as increasingly Australian bricks-and-mortar retailers are developing sophisticated online offerings to complement their traditional shop fronts. All categories

Home Central Shepparton, VicManaged on behalf of Valad Property Group


Metro OfficeRETAIL

except Daily Deal and Personal Goods recorded growth in March. Electronic Games and Toys experienced a significant decline in growth although this segment is a relatively small share of online spending, and its growth rate is typically quite volatile. Across other categories, Media and Homewares maintained double digit growth, followed by high single digit growth for grocery and liquor, and department stores. Online fashion has been more subdued recording growth below five percent.

GROWTH IN ONLINE SALES VS RETAIL SALES

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Online Index (NAB) yoy growth % Retail Sales (ABS) % of Retail Sales

Source: Colliers Edge/NAB/ABS

A proposal to charge a fee on goods bought from overseas online retailers was recently rejected by cabinet ministers amid concerns it would have been seen as a hit on consumers. The move was reportedly proposed as an interim solution while agreement was sought with the states on lowering the current overseas online GST threshold of $1,000. With more than 36 million parcels coming into Australia each year, the charge could have raised hundreds of millions of dollars over the four years of the budget forward estimates. While many argue the GST should be applied equally, the issue will be applying it in a workable manner. A number of reviews have found that the cost of collecting the extra tax would outweigh the revenue generated, although the government argues the costs of administering the tax will come down as technology improves.

Supply pipeline increasesThe Australian retail sector is in the midst of a boom in shopping centre supply. The number of shopping centres currently under redevelopment, about to commence construction, and in the planning phase has jumped markedly. The pace of supply is now anticipated to be above long-term average levels over the next few years. While the backdrop for retail sales is relatively attractive, consumer confidence remains an issue. For many retailers space optimisation continues to be a key focus; at the same time shopping centre owners are focusing on unlocking value from existing assets through development and repositioning. We expect supply additions to be led by activity in the large format retail and regional shopping centre categories.

Australia went through a period of very low retail supply from 2009 to 2012 – owners are now to some extent playing catch-up. Overall the retail development pipeline has accelerated and expanded, particularly over the past 12 months. Retail completions

in 2014 were at the highest level since 2008, with just under 600,000sqm supplied. Major projects included Emporium Melbourne; Macquarie Centre in Sydney; Westfield Miranda in Sydney; Wollongong Central; Ocean Keys in Perth; DFO Homebush in Sydney; and Westfield Garden City in Brisbane. While the level of completions in 2015 is expected to fall to around 300,000sqm; 2016 will see nearly 700,000sqm of shopping centre space supplied to the market.

Major institutional owners currently have over $10.5 billion worth of retail development in the pipeline, across around 95 projects. The regional shopping centre sector will account for circa $7.8 billion of the forecast supply. The institutional development pipeline is skewed toward New South Wales and Queensland. The increase in supply of retail floor space reflects improved conditions in capital markets, with A-REITs and institutional owners now in a better position to fund the expansion and redevelopment of assets. Capital markets are now having a greater impact on development activity – this has occurred follow strong trading activity in retail assets over 2013 and 2014. Capital is in effect being recycled to fund future development projects.

Luxury a standout performerThe luxury goods market in Australia has experienced robust growth underpinned by rising household wealth, healthy inbound tourism and a steady influx of international brands. The strong growth being experienced in the luxury sector is not confined to Australia. Globally, Asia has been driving demand for luxury goods. As the industry matures, luxury has become one of the standout retail performers over the past few years. Many global luxury brands nominate Australia as a key market for expansion.

The populations of Sydney (4.84 million) and Melbourne (4.44 million) provide the scale and depth of market these luxury

Mt Ommaney Centre, QldSold on behalf of AMP Capital Investors for ACPP


retailers seek. While luxury retailers do have some presence in other capital cities, their focus continues to be the two largest eastern seaboard markets. Behind Sydney and Melbourne, Auckland is the next choice destination for many luxury retailers looking at the region. Auckland currently has a population of around 1.42 million and has been increasing steadily - just over half of New Zealand’s population growth over the last five years occurred in Auckland. The other attraction is that Auckland harbour is one of the main docking points in New Zealand for cruise ships. These ships bring significant benefit to the local retail economy.

Australian luxury consumers are predominantly local shoppers estimated to make up 60 to 70 percent of the market, with the remaining 30 percent made up of inbound tourists, chiefly from Asia. Tourism is a big driver of growth in luxury sales. Shopping is one of the largest contributors to tourism consumption, accounting for $14.3 billion in 2013/14. It is estimated that over one third of luxury goods bought by Chinese, Japanese and other Asian consumers are purchased while traveling overseas – this represents a significant opportunity for luxury retailers in Australia. China is now Australia’s second largest inbound tourism market behind New Zealand, and the most lucrative in terms of money spent per visitor.

While there are estimated to be around 80 major luxury brands globally, Colliers has identified 42 that are currently active in the Australian market. Between these 42 brands they operate 239 stores across the country. A selected number of the luxury brands without freestanding stores do have some presence in Australia, either through department store concessions or wholesale channels via independently operated specialty stores. We expect a further 20 brands to open stores in Australia in the medium-term, potentially requiring around 100 stores. The Sydney CBD and Melbourne CBD remain the leading luxury cities in Australia accounting for 35 percent of all luxury retail stores across the country.

While Castlereagh Street has traditionally been the heart of the luxury precinct in Sydney, a number of retailers are now choosing to locate on George Street. A new luxury precinct is forming along George Street between Martin Place and King Street, extending up to Castlereagh Street. The driver behind this has been the availability of large format space for the creation of flagship stores. In the Melbourne CBD, the Paris end of Collins Street remains the location of choice for most luxury brands. Outside of CBD locations, Westfield Sydney, Chadstone and Westfield Bondi Junction are the preferred locations. The ability of retail property owners to engage and attract luxury operators will become increasingly important. Leveraging this demand will enhance shopping centre asset values for landlords and drive further revitalisation of CBD retailing.

Leasing trends and sales growthThe retail sector remains very competitive with recent data from the ABS suggesting that retail profit margins have remained

around the same level over the past year despite strong growth in sales. While consumers are spending more, they continue to be very value conscious. For retailers, recent falls in the Australian dollar have increased import costs, which should flow through over coming months. With a relatively constrained domestic economy, it may be difficult for retailers to pass on these higher costs to consumers. The degree of this impact will be checked by the longevity of the recovery in retail sales, the level of hedging and amount of investment that retailers have made to drive business efficiencies over the past few years.

For the first quarter of 2015 the majority of major listed shopping centres owners have reported improving specialty retail sales growth across their portfolios. However, weaker performance in clothing and particularly department and discount department stores (DDS) will continue to impact on turnover growth. Tenant enquiry levels continue to improve with strength still most evident across the food and beverage category. Retail property owners are generally in a stronger position, with the pressure from tenants to reduce rents having abated. Rents have largely stabilised, but incentives are still prevalent although very much dependant on location.

The improvement in retail spending is starting to flow through to occupancy rates, but the uplift in rents is taking longer to materialise. Releasing spreads are slowly improving and trending towards positive territory. Overall, fixed escalators in specialty leases continue to be offset by negative releasing spreads. Regional shopping centre owners report the strongest gains in releasing spreads however they are still generally negative. The extent of rental income growth uplift has been limited and may not become meaningful until later in the upswing cycle - still 12 to 18

The Block Arcade, Melbourne VicLeased on behalf of The Block Arcade Pty Ltd


Metro OfficeRETAIL

months away. Given the current demand and supply drivers, we expect that comparable income growth for shopping centres will be constrained. Growth in retail sales will to an extent be absorbed by supply additions. We anticipate continued strong performance from those retailers in food-related categories or those benefiting from growth in house prices.

The future of the department store in Australia remains topical, as they continue to lose market share to specialised clothing and household goods retailers. Similar to other clothing retailers, overall prices have been close to flat following a sustained period of discounting. It was recently reported that Myer will close its 10,500sqm store at Top Ryde City in Sydney. The four year old store will most likely be replaced with a large format Coles supermarket and some mini-majors. Despite the high profile exit, these changes are expected to enhance the tenancy mix, sales performance and income growth of the centre. Over the past few years both David Jones and Myer have scaled back plans for new-stores, closed or downsized some existing stores. Over the last three years Myer has closed six stores when leases expired – Elizabeth, Fremantle, Forest Hill, Dandenong, Hurstville and Tuggeranong. It has also handed back space at Warringah and Miranda and abandoned plans for new stores at Green Hills, Woden and Plenty Valley. With David Jones under new ownership we expect the department store to reposition itself further upmarket, particularly in CBD locations. Part of this is expected to include more in-store concessions from luxury retail brands.

Sharper pricing characterises investmentThe retail transactions market experienced a strong close to 2014, with total sales (greater than $10 million) for the year reaching $7.28 billion. Activity during the year was dominated by trading of neighbourhood shopping centres, with 76 centres changing hands during the year, similar to levels recorded in 2013. There was also strong trading of sub-regional centres, with the average value of centres sold increasing to $77.5 million compared with $67.5 million during 2013. Year-to-date 2015 there has been 27 transactions totalling $1.3 billion, similar to volumes and values recorded for the same period last year. Given the large amount of shopping centres currently on the market we anticipate that sales figures for the second half of the year will be stronger than the first half of 2015.

RETAIL TRANSACTIONS GREATER THAN $10 MILLION

$0

$1,000,000,000

$2,000,000,000

$3,000,000,000

$4,000,000,000

$5,000,000,000

$6,000,000,000

$7,000,000,000

$8,000,000,000

2009 2010 2011 2012 2013 2014 2015 YTD

Valu

e

Source: Colliers Edge

The Block Arcade, Melbourne VicLeased on behalf of The Block Arcade Pty Ltd

Northland Shopping Centre, Preston VicSold on behalf of Canada Pension Plan Investment Board


Home Hub Castle Hill, NSWManaged on behalf of LaSalle Investment Management

Strong demand for retail assets will continue through 2015. Investors are increasingly factoring upside in rents when pricing assets as we start to see an improvement in leasing market conditions. As a result we are seeing sharper pricing for retail assets across the board. The weight of funds chasing placement combined with the low cost of borrowing has resulted in further yield compression across the sector. This has been particularly evident for large format retail and neighbourhood assets. The spreads between prime retail yields and bond yields is close to all-time highs – currently 380 basis points. Wholesale and unlisted funds have been the most active purchasers and given they have raised significant funds will continue to seek acquisition opportunities over the course of 2015. Investors from China have not been a feature of the retail market the same way they have in other commercial sectors. We have seen a handful of centres with residential development potential sold to Chinese investors. In May, private Taiwanese company Shayher Group who acquired the sub-regional centre Capalaba Central for $148.5 million. The management intensive nature of retail assets often deters offshore investors unless they are partnering with a local group. Limited access to prime retail stock and transactions of scale has seen some Australian investors looking offshore for investment opportunities. The country’s biggest superannuation fund Australian Super recently made its largest direct property deal, purchasing a 25 percent stake in the Ala Moana Centre in Hawaii for $1.1 billion.

AUSTRALIAN PRIME RETAIL YIELD VS 10YR BOND RATE

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Source: Colliers Edge/RBA/IPD

Growth in returns led by large format retailAustralian commercial property continues to deliver favourable returns against global property markets. According to Investment Property Databank (IPD), over the year to December 2014, Australian retail property returned 10.7 percent, composed of 6.7 percent income growth and 3.8 percent capital growth. This compares with a 10 percent return for office property; 12 percent from the hotel sector and 13 percent for industrial assets. Returns for the retail sector are at their highest level since June 2011 and have been boosted by strong capital growth; while income growth remains broadly unchanged. Neighbourhood centres provided the highest return over the 12 months to December 2014 at 14.7 percent – outperforming all other property types and sectors. Returns for neighbourhood centres are now at their greatest level since September 2007. The strongest growth in annualised returns occurred in the large format retail sector, which returned 14.5 percent, an increase of 4.2 percent over the year to December 2014. This was driven by an improvement in capital growth at 6.1 percent; and steady but solid income growth of eight percent. Large format retail has benefited from strong activity in the housing sector driving robust growth in household goods turnover. Sub-regional shopping centres saw an improvement of 2.6 percent over the 12 months to December 2014, returning 13.2 percent. Returns for super and major regional, and regional shopping centres have improved marginally over the past year, showing a return of 8.5 percent and 9.3 percent respectively, but still lag other retail formats.

RETAIL PROPERTY TOTAL RETURNS

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Source: Colliers Edge/RBA/IPD


Metro OfficeRETAIL

Investors pick retail The value of retail property purchased in New Zealand in 2014 was higher than any other sector, with a two-decade record of $2.8 billion. Investors are spending up large in New Zealand’s retail sector, confident in its value proposition in a tight market. Rising optimism for more purchasing activity is the health of the sector – arguably the best it has been in seven years. The growing population is confident in New Zealand’s outlook, and showing signs they want to start spending again, but not all sectors will benefit.

Key findings• Investors spent $2.8 billion in 2014 on retail property, the most

in two decades, outpacing the office and industrial sector. Singapore’s GIC entering into the New Zealand market was a clear signal that retail is a hot sector in New Zealand.

• There could be close to another $1 billion of retail sales in 2015 from five retail assets - four more Westfield centres up for grabs in Auckland, Hamilton and Wellington, along with Kiwi Property’s Centre Place in Hamilton.

• Population growth is seeing the emergence of new town centres and large format retail to cater to New Zealand’s expanding residential market and DIY sector.

• Consumers feel good about their current and future situation. Real spending per capita is back on track, but not all sectors are receiving high levels of spending activity. Some sectors are still relying on high volumes of sales rather than pricing in higher margins.

National sales activityIn Auckland, Wellington and Christchurch investor confidence in the retail sector is high, according to our latest Colliers survey.

Although the number of optimists versus pessimists has kept relatively steady over the last year, the dramatic rise in confidence since 2009 is a stand-out. With the benefit of hindsight, the shift points to a clear signal in investors’ re-rating of risk in the sector, signalled in late 2012 by an improvement in data. This ties in with New Zealand’s acceleration in economic activity when GDP was rising, house prices were increasing and people had become more confident in their current and future employment. The positive picture for New Zealand’s economy over the next five years, points to a strong run in investor confidence and greater levels of sales activity.

RETAIL PROPERTY CONFIDENCE

-80%-74%

-57%

39%

9%

41%43%

15%

37%

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

Auckland Wellington Christchurch

Reta

il In

vest

or C

on�d

ence

(Ne

t Pos

itive

)

Mar-09 Mar-14 Mar-15


Not all properties sought afterInvestors are optimistic, but this is not the experience of all property types and sectors. Investors in different price brackets are driving the market.

• Owner-occupiers dominate the under $2 million sector, favouring new shops with small footprints and high-volume turnover. They will bid fiercely, often driving down yields to the five to six percent range in most markets. Some will go sub five percent. This was a recent occurrence with The Foundation retail development in Auckland. Provincial markets will typically be higher with seven units at Rototuna Village in Hamilton a recent example, selling between 6.5 and seven percent.

• Investors searching for retail property between $2 million and $5 million are dealing in a market with few opportunities. In 2014 there were just 70 sales across New Zealand. Investors typically fall into two categories, passive or add-value. Passive investors in this price segment gravitate towards location, quality of covenant or fixed rent rises. Add value investors will identify a market gap, such as re-configuration, lease renewal/extension or repositioning of the premises with capital expenditure. Yields vary greatly due to the investor’s purchasing

118-124 Queen Street, Auckland NZLeasing on behalf of a private investor

New Zealand market overview


strategy. Recent examples include 35 Willis Street in Wellington; 52-56 Clyde Road in Browns Bay Auckland; 128 Victoria St West in Auckland and 100 Heretaunga Street in Hastings.

• Investors in $5 million to $30 million retail assets are savvy and more often than not will be looking at opportunities in the large format retail sector. These will be well-known brands, and ideally, a standalone property to reduce management responsibilities. Supermarket, hardware or homeware retailers are hot prospects with little capital expenditure requirements. Investors are looking for fixed rental growth and capital appreciation from yields that are forecast to remain firm in this cycle. Syndicators are active in this sector. Bidding for the right

asset will see yields sub seven percent for the best standalones, and up to eight percent for multi-tenant retail hubs. Provincial opportunities will likely be slightly higher. Recent examples include the Countdown and specialty shops at 45-49 Jackson Street in Wellington; 140 John F Kennedy Drive in Palmerston North, and Bunnings Warehouse in Silverdale, Auckland.

• In the last three years, opportunities for purchasers to buy properties over $40 million, or high value shopping centres, have been better than in previous cycles. The most recent are listed in the accompanying table. Between July 2012 and December 2014 there has been $513.95 million of retail property sales over $40 million.

ADDRESS REGION SALE DATE AREA (M²) SALE PRICE PASSING YIELD RATE ($/M²)

Apex Mega Centre Mt Wellington Highway, Mt Wellington

Auckland Dec-14 16,071 $64,000,000 7.00% $3,982

Southgate Shopping Centre Corner Great South Road & Walters Road, Takanini

Auckland Nov-14 21,147 $58,500,000 7.62% $2,766

Pakuranga Shopping Centre Cnr Ti Rakau Drive and Pakuranga Road, Pakuranga

Auckland Oct-14 2,900 $96,000,000 8.01% $3,287

Waitakere Mega Centre 5 Vitasovich Avenue, Auckland Auckland Apr-14 18,027 $45,750,000 8.20% $2,538

Roskill Retail Centre 22 Stoddard Road, Mt Roskill Auckland Aug-13 8,589 $32,850,000 7.05% $3,824

Porirua Mega Centre Cnr Semple & Paramoana Streets, Porirua

Wellington May-13 17,988 $30,500,000 9.56% $1,696

The Hub Whakatane State Highway 30, Whakatane Whakatane May-13 18,301 $25,500,000 10.45% $1,393

Silverdale Centre 61 Silverdale Street, Silverdale Auckland Apr-13 23,028 $78,000,000 7.08% $3,387

St Lukes Mega Centre Corner St Lukes Road & Wagener Place, St Lukes

Auckland Apr-13 7,211 $23,700,000 8.05% $3,287

Palm Beach Shopping Plaza 7 Gravatt Road, Tauranga Tauranga Feb-13 13,963 $32,500,000 8.59% $1,970

Pakuranga Shopping Centre Corner Ti Rakau Drive and Pakuranga Road, Pakuranga

Auckland Dec-12 29,199 $81,700,000 9.37% $2,798

The Plaza Whangaparaoa Shopping Centre 6 Main Street, Whangaparaoa

Auckland Nov-12 19,663 $29,500,000 10.94% $1,500

80 Lunn Avenue, Mt Wellington Auckland Nov-12 2,979 $12,800,000 6.97% $4,297

Kelston Shopping Centre Corner West Coast Road & Great North Road, Kelston

Auckland Oct-12 7,709 $28,500,000 8.13% $3,697

Downtown Shopping Centre Queen Street, Auckland CBD Auckland Sep-12 13,793 $90,000,000 7.80% $6,525

The Mall & Campus Park Main Street, Upper Hutt Wellington Jul-12 26,354 $18,000,000 9.93% $683


RECENT MAJOR RETIAL SALES IN NEW ZEALAND


Metro OfficeRETAIL

How else can we help you? Speak to one of our property experts [email protected]

For further information please contact: Chris Dibble National Manager | Research | Tel +64 9 359 7919 [email protected]

Northwest Shopping Centre, Westgate NZValued on behalf of DNZ

Will retail investors remain optimistic? Investors remain bullish for retail premises in strong catchments, but there are a dwindling number of these types of premises available for purchase. Another $1 billion of pending retail sales in 2015 from five retail assets - four more Westfield centres up for grabs in Auckland, Hamilton and Wellington, along with Kiwi Property’s Centre Place in Hamilton – could satisfy some of the purchasing demand in 2015. Expansion in the large format sector will continue to provide some of the market with purchasing opportunities. Immigration at record highs and residential growth will spur on activity in the DIY sector, as well as suburban retail offerings. New town centres will provide multiple opportunities of smaller retail offerings, and low interest rates will keep syndicators busy.

Do the fundamentals stack up?The GFC cost New Zealand retailers seven years in retail spending. In March 2007 real retail spending per capita was $16,340 but this dropped to $14,736 only two years later. It took until 2014 to return to 2007 levels, reaching $16,463 in March 2014. With retail sales back on track after a positive period of economic fundamentals which has been at odds with many countries in the OECD, retail sales per capita are now growing at four percent per annum.

The chart below shows that the growth by sector is disparate. Similar to trends in the Australian market, the growth in clothing, electrical and recreational goods spending over the last two years has taken a back seat to the impressive growth recorded in the hardware, building and garden supplies sector.

RETAIL SPENDING GROWTH BETWEEN 2012 AND 2014

5.8%

7.1%

2.1%

5.1%

9.6%

14.7%

7.8%

15.1%

21.0%

0.6%

–

–

–

2.3%

1.5%

4.3%

6.8%

9.0%

-5% 0% 5% 10% 15% 20% 25%

Core industries total

All industries total

Supermarket and grocery stores

Specialised food retailing (excluding liquor)

Liquor retailing

Non-store and commission based retailing

Department stores

Furniture, �oor coverings, houseware and textile goods retailing

Hardware, building and garden supplies

Recreational goods retailing

Clothing, footwear and personal accessory retailing

Electrical and electronic goods retailing

Pharmaceutical and other store based retailing

Accommodation

Food and beverage services

Source: Colliers International Research/Stats NZ Note: Actual Retail Sales

One of the reasons for the buoyant activity, but lower sales environment, is how purchasing behaviours have changed. Consumers are optimistic, as portrayed in the latest ANZ-Roy Morgan Consumer Confidence survey, but they are demanding. Consumers are more informed about price and quality than in previous cycles. The ability to shop in different channels and different markets with greater ease has meant that consumers have become more selective of the retailer, the product offering, the price and the method of delivery or pick-up. The Warehouse Group’s foray into click and collect with its Torpedo7 and Red Sheds is a recent example. While this change in purchasing dynamics has brought some retailers and consumers closer together via an enhanced retailing experience, some retailers are not equipped for such a symbiotic relationship and will continue to struggle in the omni-channel retail world.


RETAIL TURNOVER GROWTH LED BY HOUSEHOLD GOODS

SUPPLY OF RETAIL FLOOR SPACE IS ACCELERATING

LARGEST SALE BY SECTOR

DEMAND FOR RETAIL ASSETS WILL EXCEED SUPPLY IN 2015

LARGE FORMAT RETAIL CENTRES SHOW STRONGEST GROWTH IN RETURNS UP 4.2% IN 2014

LUXURY RETAIL TRENDS 2015

80 major luxury brands globally – 42 active in Australia with 239 stores.

Sydney CBD and Melbourne CBD are leading luxury in Australia accounting for 35% of all luxury stores across the country.

Tourism is a big driver of growth in luxury sales.

Australians make up 60-70% of luxury consumers, with the remaining 30% from inbound tourists (mainly from Asia).

Our perspective RETAIL AUSTRALIA


How else can we help you?Speak to one of our property experts [email protected]

For more information about Colliers Internationaland working with us visit:www.colliers.com.au

FIRST HALF 2015

Myer Centre Adelaide $288 million

YTD April 2015

Expected supply in 2015Year to March 2015

297,912m²

132,462m²128,666m²

56,522m² 57,979m²

CBD Retail Sub-regional shopping centre

Neighbourhood shopping centre

Large format retail

Pacific Square Shopping Centre Maroubra

$137 million Bunnings Maribyrnong $39.075 million

Forrestfield Forum & Marketplace $40 million

CBD retail

Neighbourhood shopping centres

Regional shopping centres

Large format retail

Sub-Regional shopping centres

13.2%

Sub-regional centres

14.5%

Large format retail

14.7%

Neighbourhood centres

Super and major regional centres

8.5%9.3%

Regional centres

10.7%

Total retail

TRANSACTION VOLUMES

TOTAL SALES

2011 = $3.25 billion

2013 = $7.65 billion

2012 = $6.95 billion

2014 = $7.28 billion

2015 YTD = $1.30 billion

4.5%

Total retail turnover

2.2%

Other retailing

4.0%

Food retailing

8.0%

Household goods

6.0%

Clothing, footwear & personal accessories

2.6%

Cafe’s restaurants & takeaway food

5.2%

Department stores

RETAIL TURNOVER GROWTH LED BY HOUSEHOLD GOODS

SUPPLY OF RETAIL FLOOR SPACE IS ACCELERATING

LARGEST SALE BY SECTOR

DEMAND FOR RETAIL ASSETS WILL EXCEED SUPPLY IN 2015

LARGE FORMAT RETAIL CENTRES SHOW STRONGEST GROWTH IN RETURNS UP 4.2% IN 2014

LUXURY RETAIL TRENDS 2015

80 major luxury brands globally – 42 active in Australia with 239 stores.

Sydney CBD and Melbourne CBD are leading luxury in Australia accounting for 35% of all luxury stores across the country.

Tourism is a big driver of growth in luxury sales.

Australians make up 60-70% of luxury consumers, with the remaining 30% from inbound tourists (mainly from Asia).

Our perspective RETAIL AUSTRALIA




FIRST HALF 2015

Myer Centre Adelaide $288 million

YTD April 2015

Expected supply in 2015Year to March 2015

297,912m²

132,462m²128,666m²

56,522m² 57,979m²

CBD Retail Sub-regional shopping centre

Neighbourhood shopping centre

Large format retail

Pacific Square Shopping Centre Maroubra

$137 million Bunnings Maribyrnong $39.075 million

Forrestfield Forum & Marketplace $40 million

CBD retail

Neighbourhood shopping centres

Regional shopping centres

Large format retail

Sub-Regional shopping centres

13.2%

Sub-regional centres

14.5%

Large format retail

14.7%

Neighbourhood centres

Super and major regional centres

8.5%9.3%

Regional centres

10.7%

Total retail

TRANSACTION VOLUMES

TOTAL SALES

2011 = $3.25 billion

2013 = $7.65 billion

2012 = $6.95 billion

2014 = $7.28 billion

2015 YTD = $1.30 billion

4.5%

Total retail turnover

2.2%

Other retailing

4.0%

Food retailing

8.0%

Household goods

6.0%

Clothing, footwear & personal accessories

2.6%

Cafe’s restaurants & takeaway food

5.2%

Department stores

Demand from global fast fashion and luxury retail brands continues to drive demand for retail space in CBD locations. There are currently a number of luxury retailers active in the market looking to establish new stores or relocate existing ones. Yet, there continues to be a shortage of appropriate locations for the creation of large-scale flagship stores. Luxury brands tend to cluster in key areas - from a property perspective, the issue for many retailers is finding a position with suitable adjacencies. We continue to see new food and beverage concepts being rolled out, with fast casual dining the most popular category. Food, entertainment and leisure precincts remain in demand, with a trend toward longer weekday trading hours and weekend trade. This is evident around transport hubs and in close proximity to student populations. All major supermarket operators are scouring CBD locations for convenience style small format stores. These are generally 200 to 900sqm in size, with operators willing to adapt to suit the space. Demand is being driven by growing CBD resident and worker populations, and the strong growth in overseas visitor arrivals.

Leasing marketCBD redevelopment provides opportunityDemand while generally strong has been mixed across the prime CBD retail precincts. The redevelopment and revitalisation occurring across CBD retail markets is providing more opportunity

for tenants, and driving leasing demand. For most CBD precincts rents have remained stable, with growth occurring in selected markets and precincts. The supply of space in some markets and the resulting shuffle of tenants have also impacted rental levels. Sydney remains the most expensive CBD market in the country and recorded the strongest growth in rents despite limited activity.

The flow of new international brands entering the market continues, with PrettyBallerinas recently opening its first Australian store in Westfield Sydney. The store is the first in a rollout planned for other major shopping precincts in Australia. The Luxury Retail Group has launched premium accessories brand Folli Follie into Australia with a store at the Queen Victoria Building in the Sydney CBD. An undisclosed second location is

CBD RETAIL MARKET SNAPSHOTINDICATOR 1H 2015

Prime CBD Mall Average Gross Rental Range ($/m²) $2,775 - $8,750

Supply Additions 2015 (m²) 56,522

Prime Yield Range 4.5% - 8%

COLLIERS INTERNATIONAL RESEARCH

Competition for space continues

CBD RETAIL

First Half 2015


Wintergarden, 1 O’Connell Street, Sydney NSWLeasing on behalf of Lend Lease and Harina


Metro OfficeRETAIL

scheduled to open in late 2015. Luxury brands that have recently either entered the market or expanded their presence include: Dolce & Gabbana, Tod’s, Rolex, Chanel, Dior and Cartier. There are also reported to be a number in the marketplace searching for sites to open flagship stores in the short-to-medium-term including: Fendi, Alexander McQueen, Van Cleef & Arpels, Marc Jacobs, Piaget, De Beers, Graff, Harry Winston, Saint Laurent, Valentino, and BCBG Max Azria. Demand in Melbourne’s Bourke Street Mall remains strong with a number of global retailers rumoured to be looking for a Melbourne CBD presence including Sephora, Zara Home and Brooks Brothers. The location is highly sought after by fast fashion brands, while the Paris end of Collins Street is the preferred location for luxury brands. Current average gross rents for the Melbourne CBD retail core are $7,500/sqm.

Prime CBD mall average gross rents in Sydney are currently $8,750/sqm having increased from $8,500/sqm over the course of 2014. Muji recently opened its first Sydney store on level 1 of The Galeries at 500 George Street. This is Muji’s third store in Australia after opening at Melbourne’s Emporium and in Chadstone. The new store will be around 1,345sqm. H&M will soon open in the Sydney CBD, the three-level store will be located at the Glasshouse centre on Pitt Street Mall and span 5,000sqm over three levels. Zara Home will also open a flagship store later this year at Glasshouse. H&M have recently confirmed they will open at 170 Queen Street in the Brisbane CBD in late 2015. Previously known as Broadway on the Mall, the ISPT-owned centre is currently undergoing a refurbishment. Average gross rents for the Brisbane CBD retail core are $4,500/sqm having remained steady over the past six months. Late last year Tiffany & Co. opened its first flagship store in Adelaide, located at 210 North Terrace in the CBD. The store features three salons totalling 350sqm. Rundle Street Mall remains the prime location in the Adelaide CBD and continues to see strong demand from tenants. Average gross rents for the Adelaide CBD sit at $3,100/sqm. Following the reopening of Carillion City in the Perth CBD activity has been limited – current average gross rents for the Perth CBD have remained stable at $2,775/sqm.

PRIME CBD MALL AVERAGE GROSS RENTS

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

Sydney Melbourne Brisbane Perth Adelaide

$ pe

r sqm


Investment marketScarce trading of assetsThe CBD retail investment market continues to be characterised by low volumes of turnover. During 2014 there were only seven CBD retail property assets sold across the country, similar to levels in 2013. When an asset does come to market, enquiry is usually strong from a wide range of investors, both private and institutional. Year-to-date 2015 there has been three transactions for a total of $388.1 million – close to the total value of sale recorded across 2014. Activity in the sub-$10 million market (not covered in this report) has been quite active, with offshore investors and SMSF dominant in this segment of the market.

The largest CBD retail asset to trade so far in 2015 is the Myer Centre in Adelaide. It is also the largest CBD retail transaction since late 2013. The centre has been sold for $288 million to Singapore-based real estate investment trust, Starhill Global REIT showing a yield of 6.64 percent. Located within Rundle Mall, the property comprises around 60,000sqm of retail space and 10,000sqm of office accommodation. It features eight mini-major tenants, 88 specialty tenancies, 11 kiosks, six ATMs and 467 basement car parking spaces. The centre has recently undergone a $35 million upgrade including a complete refurbishment of the 30,000sqm Myer store. The centre was sold by Novion Retail Partnership and the transaction is expected to complete at the end of May, subject to the approval of the Foreign Investment Review Board.

MetCentre, 60 Margaret Street, Sydney NSWLeasing on behalf of Mirvac and MTAA Superannuation Funds


Also sold recently was the former Darrell Lea building located at 396 George Street in the Sydney CBD. The property sold for $25.1 million on a reported yield of around four percent. The building was sold to a private investor who also owns the sites that house the flagship Apple and the Louis Vuitton store, both opposite. Telstra is the buildings current tenant, with its new Discovery Store which was opened last year following a $112 million refurbishment.

CBD RETAIL TRANSACTIONS GREATER THAN $10 MILLION

$0

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

$700,000,000

2009 2010 2011 2012 2013 2014 2015 YTD

Valu

e


Yields continue to firmNational CBD retail investment yields continue to firm at the prime end of the market. This trend reflects the impact of new supply

and new retailers entering the market. Prime CBD yields across Australia currently range between 4.5 percent and eight percent and remain close to cyclical lows. Due to the limited supply of investment stock and strong competition for assets, both prime and secondary CBD assets are expected to show some further tightening over the next six to 12 months.

According to the IPD Australia Commercial Property Digest, total returns for other retail (which includes some city centre retail) increased by 2.9 percent to be 11.7 percent over the year to December 2014. Other retail recorded strong growth of 1.1 percent during the last quarter of 2014. Returns from other retail sit ahead of regional sector returns, but behind all other retail sectors.

CBD RETAIL YIELD RANGE

3%

4%

5%

6%

7%

8%

9%

NSW Vic Qld SA WA

Yiel

d (%

)


580 George Street, Sydney NSWRetail leasing on behalf of GPT Group


Metro OfficeRETAIL


For further information please contact: Nora Farren Director | Research | Tel +61 2 9257 0289 [email protected]

Supply and demandThe bulge effect reshaping city retailAnother emerging trend is the bulge effect in the CBD core to accommodate international retailers. This is occurring across Sydney, Melbourne and Brisbane; cities attracting international retailers who require larger spaces in the core retail precincts. This bulge is evident in areas like Pitt Street Mall in Sydney, where international retailers are coming in and requiring spaces of around 3,000sqm. This is pushing the local brands, which typically only require circa 250sqm, into surrounding streets. This bulge effect is changing the face of core retailing across the globe. In core retail precincts in major cities such as it London, New York, Tokyo or Paris, you will find the same brands along the main strip, with local retailers pushed out to secondary locations.

George Street in the Sydney CBD is being reinvigorated with more than $3.5 billion of development in the pipeline and new projects for nearly every block between Town Hall and Circular Quay. Much of the catalyst for all this redevelopment is the $2 billion light rail project, which has been more than a decade in the making. The Martin Place precinct in the Sydney CBD is undergoing rejuvenation with a number of properties under development and a new wave of retail tenants focusing on the area. Martin Place will be linked to the new light rail running down George Street providing increased accessibility. However, the light rail is causing some uncertainty amongst retail tenants as they jostle for position along George Street. The South African owners of David Jones are reported to be interested in the development rights to the City Tattersall Club which neighbours their Sydney

CBD stores. The group is also still reviewing plans for its four key Sydney and Melbourne properties estimated to be worth up to $1 billion.

New development and refurbishments have refreshed the retail offer across CBD markets. Following elevated levels of supply in 2014, the provision of retail space across CBD markets will be relatively subdued in 2015, with only 57,979sqm expected to complete. The largest project is the refurbishment of 170 Queen Street in Brisbane, which will supply around 13,000sqm in late 2015. Completion of stage 1 of the MLC Centre retail redevelopment in the Sydney CBD is expected by mid-2015. Works are continuing on the refurbishment, the remix of the food court, and introduction of state-of-the-art end of trip facilities for the office tower. A development application has been lodged with the City of Sydney Council for stage 2 of the retail redevelopment, which will deliver new luxury retail on Castlereagh and King Streets, and an enhanced bar and dining offer fronting Martin Place. The Glasshouse on Pitt Street Mall in the Sydney CBD is undergoing a repositioning to accommodate international brands. Once complete in late 2015, the centre will contain a flagship H&M store and Zara Home.

Superannuation fund-backed ISPT has won approval for a $100 million redevelopment of its Forrest Chase shopping centre in Perth’s CBD. The centre on the corner of Murray Street and Forrest Place, will be integrated with the City Central centre. The project will include new international retailers, an additional 30 specialty fashion and lifestyle stores, food and dining areas and work on the existing Myer department store. The project is expected to be completed by 2017.

476 George Street, Sydney NSWLeasing on behalf of AHL


REGIONAL SHOPPING CENTRE MARKET SNAPSHOTINDICATOR 1H 2015

National Average Gross Rental Range ($/m²) $1,460 - $1,745


Super Regional Yield Range 5.00% - 6.25%

Prime Yield Range 5.50% - 6.50%

Secondary Yield Range 6.50% - 7.50%

The 2015 Shopping Centre News Big Guns report found the top 20 regional shopping centres across Australia turned over $15.7 billion in retail sales during 2014, an increase of three percent on the previous year. Chadstone Shopping Centre maintains its position as the top performing centre in the country with a MAT of $1.414 billion; followed by Westfield Bondi Junction with $1.024 billion. Regional shopping centres continue to expand in size cementing their already dominant market position. In 2005 only 32 centres in Australia had a GLA in excess of 70,000sqm – in 2015 there are 50. There continues to be a focus on dining, lifestyle, and entertainment precincts in new developments. Residential and other mixed-use components are also increasingly featuring in the expansion of regional shopping centres.

The strong spend and growth in regional shopping centre revenues is occurring despite an environment of low consumer confidence. High quality regional shopping centres exposed to discretionary spending are expected to outperform driven by increased sales domestically, increased demand from strong local and offshore retailers and also from increased tourism spending. Demand from international retailers is underpinning significant new development within the regional shopping centre sector and changing the dynamics of many centres.

Leasing marketInternational retailers reinvigorate centresSpecialty sales growth in regional shopping centres continues to steadily improve however sales growth for majors remains generally weak. The strongest growth categories have been mobile phones, retail services, general retail and food. The focus on international retailers moving into regional shopping centres continues with a number of high profile openings announced recently. However, not all international retailers will be successful in Australia. It was recently reported that the Hollister brand will be closing the two stores it operates – one at Westfield Bondi Junction and one at Westfield Doncaster by mid-2015. The brand owned by Abercrombie & Fitch failed to gain traction with local consumers.

International retailers doing well here are steadily growing their store networks. H&M has recently opened its second Queensland store at Westfield Garden City. The 2,500sqm store is spread over two levels. The first Queensland H&M store was opened at Indooroopilly in March 2015, with a store at 170 Queen Street in the Brisbane CBD set to open late 2015. A second Sydney store is expected to open in the CBD mid-year. The first store in Western Australia will open later this year at Perth’s Lakeside Joondalup Shopping City. The store will open in the second half of 2015 however details of the store are yet to be confirmed.

Japanese apparel retailer, Uniqlo will lease two stores in Sydney at Westfield Miranda and Westfield Parramatta. Uniqlo opened its first Sydney store last year in AMP Capital’s Macquarie Centre and has its flagship multi-level store in Emporium Melbourne. The first Zara Home store in Australia opened at Highpoint shopping centre in February. The 310sqm shop showcases all collections in the home décor brand, including Zara Home Kids. Since its launch in 2003, Zara Home has expanded rapidly, and, including Australia, now operates in 60 countries with 437 stores. Zara


Maintaining dominance through expansion

REGIONAL CENTRES

First Half 2015



Metro OfficeRETAIL

currently has around 13 stores in Australia. US-based smartwatch maker, Pebble is actively looking to grow its retail footprint in Australia. Pebble is also looking to expand beyond its current exclusive distribution agreement with Dick Smith.

Nationally, average gross rents for regional shopping centres range between $1,560/sqm and $1,745/sqm, reflecting local conditions in individual markets. Across the country the national average gross rent for regional shopping centres sits at $1,646/sqm.

REGIONAL SHOPPING CENTRE AVERAGE GROSS RENTS

$1,450

$1,500

$1,550

$1,600

$1,650

$1,700

$1,750

$1,800


$ pe

r sqm


Investment marketAcquisition opportunities limitedTransaction activity in the regional sector has tapered off over the past two years following exceptionally strong activity in 2012. There were only four sales of regional shopping centres in 2014. Year-to-date 2015 there has been no regional shopping centres traded. Due to the high barriers to entry, regional shopping centres tend to be tightly held, especially super and major regional centres. Should a centre of this nature be brought to market, demand would be very strong from both local and offshore investors. Limited access to prime retail stock and transactions of scale has seen some Australian investors looking offshore for investment opportunities. The country’s biggest superannuation fund Australian Super recently made its largest direct property deal, purchasing a 25 percent stake in the Ala Moana Centre in Hawaii for $1.1 billion. The resilience of regional shopping centres through the current retail spending cycle and the confidence about future growth prospects will continue to underpin strong investor demand although, acquisition opportunities are expected to remain limited over the course of 2015.

Home Hub Castle Hill, NSWManaged on behalf of LaSalle Investment Management


According to IPD Australia Commercial Property Digest, total returns for super and major regional retail were 8.5 percent showing an increase of 0.6 percent over the year to December 2014. Returns for regional centres were higher at 9.3 percent, improving 0.5 percent over the same period. Returns for the regional sector are lagging behind other retail formats.

REGIONAL SHOPPING CENTRE TRANSACTIONS GREATER THAN $10 MILLION

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

$3,000,000,000

$3,500,000,000

$4,000,000,000

2009 2010 2011 2012 2013 2014 2015 YTD

Valu

e


Yield compression lags other sectorsYield compression for regional centres has not been as marked as for other retail sectors. While surprising given the weight of capital chasing assets, it likely reflects the fact that there has been very few regional shopping centre transactions, and a cautious approach by valuers given the lack of transactional evidence. The lack of yield compression for regional centres also reflects the fact they did not blow out as much as other retail categories. The flight to quality, strong tenant demand (helped by offshore retailer demand), a limited supply of prime regional centres (more barriers to entry) with low risk, combined with a lower rate and lower return environment, will see regional centres perform well in 2015. Yields for regional centres remain very competitive and reflect centre location, sales performance, income growth and

the potential for centre expansion. Regional shopping centre yields maintain their position as the sharpest of all the retail centre types, reflecting the relatively high value and core nature of this category of asset. Across Australia, yields for super regional centres currently range between five percent and 6.25 percent after tightening over the past three years. Prime regional yields range between 5.5 percent and 6.5 percent, while secondary regional yields range between 6.5 percent and 7.5 percent. The mismatch between demand and supply of regional centres will result in some further yield compression for prime assets during 2015.

PRIME REGIONAL SHOPPING CENTRE YIELD RANGE

4%

5%

6%

7%

8%

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Supply and demandCompletions to slow in 2015Major institutional owners currently have over $10.5 billion worth of retail development in the pipeline, across around 95 projects. The regional shopping centre sector will account for circa $7.8 billion of the forecast supply. The institutional development pipeline is skewed toward New South Wales and Queensland. Across the regional shopping centre sector Colliers has identified 40 centres with major redevelopments underway or planned.

Mildura Central, VicSold on behalf of Federation Centres


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Indooroopilly Shopping Centre, QldValued on behalf of Eureka Funds Management

The sector could potentially supply 550,000sqm over the next three years. As a percentage of total stock by sector, we expect the supply of regional shopping centre floor space to provide additions equivalent to around 10 percent of the existing market over the next three years.

Regional shopping centres continue to adapt through increased food and beverage, introducing international retailers or by incorporating mixed-use components. Super regional centres in particular are getting stronger as destinations. Department stores continue to focus on space optimisation, which has in some instances included handing back space to landlords to improve productivity. This opens up opportunities for centre owners to enhance the tenancy mix, sales performance and income growth of regional shopping centres. Tenant demand for top performing regional centre locations continues to be steady across most categories. Although apparel remains a noticeable weak spot.

During 2014 a high number of regional shopping centre expansions were opened including Macquarie Centre, Westfield Miranda, Westfield Garden City, Indooroopilly, Lakeside Joondalup and Dandenong Plaza. Supply of regional centre floor space will be fairly subdued in 2015, with only around 57,979sqm expected to be supplied. The pace of completion will pick-up again in 2016 and into 2017.

Federation Centres and ISPT recently received approval for the redevelopment of Mandurah Forum Shopping Centre in Western Australia. The project will add around 24,000sqm of retail floor

space across 150 new tenancies. Subject to final investment approvals, construction is expected to begin within 12 months. The theme of mixed-use development is evidenced by GPT recently receiving planning approval to expand the retail floor space at Rouse Hill Town Centre from the existing 69,000sqm up to 130,000sqm and for an additional 61,400 sqm of commercial and mixed-use. GPT is also planning to add apartments onto its Highpoint shopping centre and is seeking planning approvals for expansion of the main centre by a further 60,000sqm. According to planning documents, up to 2,500 apartments will be built on land surrounding the centre as well as above the existing mall. The long-term expansion is expected to take place over the next 16 years. Up to 75,000sqm of new retail space is planned over six precincts, including the additional 60,000sqm at Highpoint, and about 15,000sqm of office space could also be added.

Woolworths (South Africa) acquired David Jones in August 2014 for $2.1 billion and took full control of Country Road in September 2014 as part of a strategy to create the largest apparel retailer in the southern hemisphere. The first big changes to David Jones’ range have commenced as Woolworths starts increasing floor space for Country Road and sister brands Mimco, Witchery and Trenery. Homeware and apparel under the David Jones brand are scheduled to appear in stores this year. Woolworths remains committed to David Jones’ house of brands strategy. They plan to increase sales of private label products in David Jones from about 2.5 percent to 20 percent over the next five years.


Leasing marketIncreased competition from regional centresSome large sub-regional centres are also facing increased competition from major and super regional centres given the increasing number of international fast fashion retailers locating in these centres. Sub-regional shopping centre owners are increasingly focusing on actively managing their assets and maximising portfolio leasing opportunities in order to optimise the retail mix within centres. Weakness in the low-to-mid level fashion and apparel sector is being reflected in the performance and demand for space from this group of tenants in sub-regional centres. However, fashion in the right location is still doing well.

SUB-REGIONAL SHOPPING CENTRE MARKET SNAPSHOTINDICATOR 1H 2015

National Average Gross Rental Range ($/m²) $950 - $1,275





Mixed fortunes for discount department storesThe sub-regional centre category continues to be impact by the performance of discount departments stores (DDS) and the increase in supply of regional centre floor space. Getting the tenancy mix in sub-regional centres right is becoming more critical, particularly those that are heavily weighted to discretionary tenancies. Similar to department stores, DDS remain relevant and continue to be rolled-out in new developments. However, international and domestic mini-majors are becoming more prevalent. The turnover growth of sub-regional centres has also been affected by the continued roll-out of new supermarkets across the country.

Performance of the major DDS brands has been mixed. Wesfarmers recently reported that comparable sales for Kmart lifted 5.5 percent, accelerating at the fastest pace in two years. While Target has reported weaker sales, with comparable turnover across the March quarter of 2015 slipping 3.2 percent. Kmart has opened eight new stores (including two replacement stores) and completed 15 major store refurbishments. They plan to refurbish 16 stores and open three new stores over 2015/16. Target will focus on refining and rolling-out new stores formats, with no new store openings in the pipeline. Woolworths run Big W reported comparable store sales down 7.3 percent during the March quarter. Brand positioning and pricing power across the DDS category will remain a challenge in 2015. The weak performance of DDS has impacted sales growth at sub-regional centres and they will require further capex from owners over the next few years as these store footprints are revisited.

SUB-REGIONAL CENTRES

First Half 2015


Shepparton Marketplace, VicSold on behalf of a private investor


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Bonnyrigg Plaza, NSWManaged on behalf of LaSalle Investment Management

Recent reporting from retailers that typically operate in sub-regional shopping centres has been encouraging. JB Hi-Fi recently reported strong sales momentum in its stores. Key positive categories include: computers, telcos, fitness and wearables, HOME and accessories. While the negative categories were: tablets, visual, cameras, and games. The roll-out of new stores is expected to focus on the HOME brand although the target number of stores has been revised down from 52 to 43 as at 2015 financial year end. Total store numbers for JB Hi-Fi currently sits at 188 and the long-term target remains at 214 stores for the group. The HOME concept will be the source of any upside from this 214 target.

Retail lease incentives remain prevalent in the sub-regional sector. Although not widespread, we continue to see some shorter lease terms with upside. Average retail incentives in the broader market are around 10 percent (or six months) on a five year lease, but can range as high as 20 percent for new incoming tenants. Often for an owner the cost of losing an existing tenant is not viable given the level of incentives required to attract a new tenant. While very centre specific, rent-free periods and contributions to fit-out costs are also still prevalent. Nationally, average gross rents for sub-regional shopping centres range between $950/sqm and $1,275/sqm, reflecting local conditions in individual markets. Across the country the national average gross rent for sub-regional centres sits at $1,052/sqm.

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Investment marketSurge in sub-regional transactionsInvestment activity in the sub-regional sector has increased significantly over the past few years with 27 sales worth $2.22 billion recorded in 2014. This follows strong volumes in 2013, with 31 transactions for a total of $2.09 billion. Sub-regional shopping centres accounted for 35 percent of all retail sales in 2014, with


the value of transactions at record levels. The increased activity across this sector has resulted in a tightening of pricing metrics for good quality assets. Year-to-date 2015 there has been six sub-regional shopping centres traded for a total of $500.4 million. There has been strong demand from wholesale funds and institutional investors; with private investors the primary vendor type. Transactions in the sector have been particularly active in the $50 million to $120 million value range, reflecting increased demand from institutional and offshore investors. Demand for sub-regional centres has benefited from capital seeking exposure to regional assets that was unable to be placed. Sub-regional shopping centres anchored by non-discretionary retailers such as supermarkets are proving popular among investors, who are attracted to the yields on offer in this sector. Conversely, bigger sub-regionals with large components of fashion are not as keenly sought by purchasers. Purchasers will continue to focus on centres that have a strong position in their trade area as well as development or repositioning potential. This is particularly important given increased competition from expanding regional shopping centres.

The largest sale of a sub-regional asset year-to-date April 2015 was the purchase of Pacific Square Shopping Centre in Maroubra for $137 million. Charter Hall announced the creation of a new retail partnership, RP6 to acquire the asset. The 13,723sqm

Capalaba Central Shopping Centre, QldValued on behalf of DEXUS and SAS Trustee Corporation

centre is located 10km south east of the Sydney CBD, anchored by strong performing Coles and Aldi supermarkets with 50 specialty retailers and a 2,500sqm gallery level leased to Fitness First. Pacific Square has 99 percent occupancy and a 5.8 year weighted average lease expiry. The transaction reflects a yield 6.5 percent. Charter Hall has committed 20 percent of RP6’s $250 million equity; $20 million of which is to be invested in the Pacific Square acquisition. The acquisition was secured off market.

At the smaller end of the sub-regional centre transaction value range was the purchase of the Whitsunday Shopping Centre in Airlie Beach. The centre was acquired by Shopping Centres Australasia Property Group (SCP) for $46.98 million from a private investor. The centre is located 1.2km from the tourist precinct of Airlie Beach and is anchored by a Coles supermarket, Target Country and 46 specialty retailers. The purchase price reflects a fully leased yield of 8.5 percent and a passing yield of 7.25 percent. The vendor provided a two-year rental guarantee.

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Yield range narrows at the top endThe spate of activity in the sector over the past two years has resulted in some narrowing of the yield range for sub-regional centres, but it remains above long-term average levels. Having a higher proportion of non-discretionary retailers in sub-regional centres and the lower occupancy cost relative to regional centres in some instances provides a competitive advantage. The yield spread for sub-regional centres remains broad as investors are still discerning of the gap between strong and weaker performing centres. Yields for prime centres with strong anchor tenant leases have experienced downward pressure. Across Australia, yields for prime sub-regional centres currently range between 6.5 percent and 7.5 percent, while secondary yields fall between 7.5 percent and 9.5 percent.

According to the IPD Australia Commercial Property Digest, total returns for sub-regional retail were 13.2 percent for the year to December 2014, recording an increase of 2.6 percent from the previous year. Growth slowed to 0.2 percent during the December quarter 2014, but sub-regional retail continues to outperform the regional sector. While income growth was relatively stable, the capital return increased 0.4 percent to 5.4 percent.


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Smithfield Shopping Centre, NSWValued on behalf of DEXUS and SAS Trustee Corporation

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Supply and demandCompletions to rise The medium-term pipeline of space for sub-regional centres is somewhat subdued when compared to other retail asset classes. However, 2015 is expected to see an increase in the supply of sub-regional space with around 128,666sqm expected to complete this year. Most of the supply under construction

is extensions to existing centres, with the construction of new centres rare. Stage 1 of the Stockland Wetherill Park development opened in March 2015. Upon completion in 2016, the additional 15,000sqm of new retail space will grow the centre to 70,000sqm. The centre will feature two supermarkets, two DDS, nine mini-majors, and around 200 specialties.

In March 2015 a new sub-regional shopping centre opened at Reservoir in Melbourne. The Summerhill Shopping Centre is a 16,500sqm convenience-based centre. The mall is a joint development between LAS Group and real estate private equity firm Qualitas, with a focus on food and services, rather than fashion. The retail offer at Summerhill complements the offering at the nearby Northland mall, owned by Novion Property Group and GPT. The centre is anchored by a 24-hour Kmart (one of only two in Melbourne) a Coles and Aldi, and supported by 3,400sqm of specialty retail across 33 shops. Other tenants include Australia Post, The Groove Train, Bank of Melbourne, Jetts Fitness, Pharmacy 4 Less, Brumby’s, Sushi Sushi, Kmart Tyre & Auto, and a 1,000sqm fresh food operator.

The Novion Enhanced Retail Fund (NERF) recently completed the acquisition of Lidcombe Shopping Centre for $60 million from the Newmark APN Auburn Property Fund. The site was formerly a large format based centre known as the Lidcombe Power Centre, and is currently being redeveloped into a two-level sub-regional centre. Located on Parramatta Road opposite Costco, the centre will be 32,700sqm on completion in mid-August 2015. The centre will comprise a full-line Woolworths, Kmart, Aldi, six mini-majors (including Anaconda and Spotlight), a ten pin bowling alley, 11 kiosks and over 50 specialty stores. In addition to the acquisition costs, NERF has entered into an agreement to contribute approximately $60 million in instalments through to completion of the development.

The majority of centres being expanded are under institutional ownership. Mirvac’s Broadway Shopping Centre continues to perform well ranking first for turnover per square metre in the 2015 Shopping Centre News Big Guns report. The centre turned over $12,258 per square metre, up 6.4 percent from the previous year. Mirvac currently has a development application in place to add 300sqm to the centre.

Work has commenced on the Willows Shopping Centre in Townsville. The redevelopment will provide an additional 11,000sqm and will include the latest format Woolworths, basement and rooftop parking, two new mini-majors and around 35 new specialty stores. The centre is owned by Dexus Wholesale Property Fund, with the development expected to be completed pre-Christmas 2017.


The expanding nature of the supermarket offer continues to impact specialty stores in neighbourhood centres. The blurring of categories across the sector with the introduction of cafes, pharmacies, ready-to-go meals and clothing departments in supermarkets is putting pressure on surround tenancies. There is increased focus on finding the right surrounding tenancy operators to compliment the supermarket in neighbourhood centres. We are seeing a barbell approach to the relative performance of shopping centres, with well-located neighbourhood centres exposed to non-discretionary spend with minimal and focused speciality offerings performing better. Competition for market share between the major supermarket chains is as intense as ever, with both running sustained discounting campaigns. The strong industry-wide supermarket store rollout, with new store opening from the major chains as well as IGA, Aldi and Costco has the potential to dilute returns for all supermarket operators - new stores are being opened at a faster rate than market growth. Woolworths and Coles plan to open between 15 and 30 new stores a year which equates to around a three percent increase in selling space. Aldi is reportedly

Supermarket offer expanding

NEIGHBOURHOOD SHOPPING CENTRE MARKET SNAPSHOTINDICATOR 1H 2015

National Average Gross Rental Range ($/m²) $538 - $988




Prime Supermarket Yield Range 5.50% - 6.50%

Secondary Supermarket Yield Range 6.50% - 8.00%


NEIGHBOURHOOD CENTRES

First Half 2015


Norwest Marketown, NSWManaged on behalf of Mulpha Australia

planning to open around 25 new stores a year on the east coast indicating floor space growth of more than six percent. While Metcash’s IGA store network is growing at a slower rate of around one percent.


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Leasing marketFood catering drives demandFood-based retail has been a strong performer, both in sales volume and as an anchor tenant. Competition between centres for good quality tenants remains strong although sales growth outside of supermarkets has been mixed. Overall tenant demand for space in neighbourhood centres is improving, with enquiry levels increasing. The main source of enquiry continues to come from the food catering sector, with some improvement in demand from apparel, jewellery retailers, services and essentials, and medical. The lower average occupancy costs for specialty tenants in food-based centres are attractive to many operators. The improvement in tenant demand is providing centre owners the opportunity to remix their centres in order to remain competitive.

Although the uptake of online grocery retailing has been slow in Australia, IBISWorld forecast revenues to reach $2.1 billion in 2015, up 14.6 per cent from $1.9 million in 2014. As an increasing part of the Coles and Woolworths business, we are starting to see some new leases for major tenants (supermarkets, department stores and discount department stores) with a separate lease provision to capture online sales that are fulfilled in-store. This is calculated as a separate turnover provision for retailers that use physical stores as a distribution point for online orders. Often there is one calculation for turnover rent based on in-store sales, and a separate formula for online sales. This is still very much

NEIGHBOURHOOD SHOPPING CENTRE MARKET SNAPSHOTINDICATOR 1H 2015





Prime Supermarket Yield Range 5.50% - 6.50%

Secondary Supermarket Yield Range 6.50% - 8.00%

in its infancy in the Australian market and primarily limited to supermarkets – we are yet to see it in specialty store leases.

Under recommendation in the Competition Policy Review, current pharmacy ownership and location restrictions would be removed, which may bring rise to the concept of a ‘super-pharmacy’, the term given to pharmaceutical services within a supermarket. There is some concern regarding the outlook for the pharmacy sector given PBS reforms that are making pharmacies less profitable. Increased competition for pharmacy retailing may negatively influence the rent they are willing to pay. Across Australia, average gross rents for neighbourhood centres currently range between $538/sqm to $988/sqm, reflecting local conditions in individual markets and centre characteristics. Across the country, the national average gross rent for neighbourhood centres sits at $687/sqm.

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Investment marketStrong trading continuesCompetition for neighbourhood centre assets intensified during 2014, resulting in investment activity reaching record high levels with 76 centres transacted for a total of $1.98 billion. The weight of funds chasing retail assets combined with the low cost of capital has resulted in competitive pricing and significant yield compression for neighbourhood centre assets. Institutions have become more prominent purchasers of neighbourhood centres. While still active, private investors have become net sellers. All types of investors have been targeting the comparatively higher yields on offer from neighbourhood centres. Investors continue to look at ways to maximise value from retail assets. We have seen increased volumes of neighbourhood centres trading with residential development potential. Owners are diversifying their retail centres to include other uses such as apartments, hotels and student accommodation. These centres are highly sought, particularly by Chinese investors.

Cottesloe Central, WALeasing on behalf of Primewest


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Year-to-date 2015 there has been 13 neighbourhood centres traded for a total of $296.3 million. The sector continues to dominate retail property transaction activity in terms of volume. Neighbourhood centres sold this year range in value from $11 million to $40 million. This type of asset appeals to a wide range of investors, from wealth privates to syndicates and institutional investors. Neighbourhood centres have proven to be resilient and an effective inflation hedge. Private investors are very active in this sector as both vendors and purchasers. The price point at which these centres can be acquired is a key driver of investment returns – with generally strong interest in centres sub-$30 million.

The largest sale of a neighbourhood shopping centre year-to-date in 2015 was the acquisition of Forrestfield Marketplace and Forum in Western Australia for around $40 million. Hawaiian purchased the centre in an off-market transaction from Singapore-based investor First United Developments. It is reported that Hawaiian will look to upgrade or expand the centre. Fort Street Real Estate Capital has acquired the Newtown Central shopping centre in Sydney for $26.42 million from Monash Private Capital. The centre was redeveloped in 2008 and is prominently located on King Street; tenants include Foodworks, Fitness First, Cellarbrations and Optus.

Yields still sitting above cyclical lowsOverall cap rates continue to firm for retail assets, with a significant improvement having occurred over the past 12 months. This has typically been led by higher yielding sectors such as neighbourhood centres. Given the significant weight of capital seeking high quality retail assets and the lower total return environment we anticipate further scope for yield compression over 2015. There is potential for further uplift in pricing, particularly for neighbourhood centres given yields are still sitting above their cyclical lows. The strong performance of food and household goods retailing have been driving much of the upswing in retail turnover, and has been reflected in the demand and pricing of these assets.

Investors of all types will continue to seek steady-income, smaller prime centres over the next 12 months. Well located neighbourhood centres that are not dependant on discretionary

spending are expected to be well placed for growth in 2015. Convenience-based retail including neighbourhood shopping centres is an attractive asset class factoring the high spreads relative to bond yields available in these centres. Having a higher proportion of non-discretionary retailers in neighbourhood centres and the lower occupancy cost relative to other retail formats provides a competitive advantage. We will continue to see a two-tiered market in the neighbourhood category. Prime neighbourhood centre yields range between 6.5 percent and 7.75 percent while secondary neighbourhood yields fall between eight percent and 10 percent. Prime yields for freestanding supermarkets currently range between 5.5 percent and 6.5 percent, while secondary yields for these investments fall between 6.5 percent and eight percent.

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Waitakere Mega Centre, Auckland NZManaged on behalf of a private investor


Metro OfficeRETAIL



The recovery of retail sector returns is the strongest in non-discretionary shopping centres. According to the IPD Australia Commercial Property Digest, neighbourhood centres provided the highest return over the 12 months to December 2014 at 14.7 percent – outperforming all other property types and sectors. Returns for neighbourhood centres are now at their greatest level since September 2007.

Supply and demandPipeline steady, but competition strongThe supply of neighbourhood centres remains focused on the construction of new centres within residential communities to service population growth. Coles, Woolworths and Aldi also remain very active in their network expansions. The medium-term pipeline of neighbourhood centre supply is relatively steady, with around 132,462sqm of space to be supplied during 2015. Supply over the next few years will be broadly in-line with long-term average levels of between 100,000sqm and 125,000sqm per annum.

Store network expansion by the major supermarket operators continues, with increased competition from standalone market entrants such as Aldi and Costco intensifying. Discount retailer Aldi increased sales by 13 per cent in 2014, outpacing food and liquor sales growth at Coles and Woolworths almost three-fold. Aldi currently has around 319 stores across Victoria, New South Wales, and Queensland, with sales reaching $6 billion in the 12 months ending December 2014. The growth was underpinned by strong same-store sales growth and 25 new stores. Aldi recently opened its second store of seven new planned Victorian stores. Aldi is taking advantage of easier Victorian planning laws that allow supermarkets to be opened in larger format retail centres, which is not as easily achieved in the other states. The push to change planning rules alongside the changes to planning and rezoning rules suggested in the Harper Review will generate more competition in the retail space. Under construction is Aldi’s 32,000sqm distribution centre in South Australia ahead of its 50-store rollout plans. The distribution centre is expected to be completed in October 2015.

Opened in late May is The Ponds shopping centre near Kellyville in western Sydney about 43kms from the Sydney CBD. The 7,000sqm centre will be anchored by a 4,000sqm Woolworths supermarket, 25 specialty retailers and 349 car spaces. Specialty retailers include Donut King, Michel’s Patisserie, Koko Thai Restaurant, Oliver Brown, Leafe Café, Wonder Sushi, Meat at The Ponds, Priceline and Star Car Wash. The centre has a five star

green star rating, a glass solar canopy and north facing outdoor terrace. It is part of a master-planned residential community with 4,200 homes that will house an estimated 12,400 people once complete.

Nearing completion is the expansion of Federation Centre’s Currambine Central located 30kms to the north of Perth. The centre is currently anchored by a Woolworths supermarket; Dan Murphy’s and has 44 specialty retailers. The addition will see a new fresh food market anchored by Farmer Jacks supermarket, six new specialty retailers and an expansion of the existing Grand Cinemas tenancy. The cost of the development, which is expected to be completed mid-2015, is $20 million.

Construction of the new Stockland Harrisdale shopping centre commenced in May 2015, and is expected to open in mid-2016. Stockland will invest $51 million to create a new 12,200sqm neighbourhood centre within its Newhaven residential community, 20 kilometres south-east of the Perth CBD. The first stage will be anchored by a full-line Woolworths supermarket and it will also include one mini-major, 30 specialty stores, five retail kiosks, six pad site retailers and 500 car parking spaces. Over time, the centre will become a full-scale, sub-regional town centre of approximately 25,000sqm.

Also under construction is the Clemton Park Shopping Centre located 13kms south-west of the Sydney CBD. The centre will be anchored by a Coles supermarket on a 20-year lease, one mini-major and 16 specialty retailers, and is part of a mixed-use projects being developed by Australand over five and a half hectares. The project will comprise around 700 apartments, an aged care facility and child care centre. The shopping centre is due for completion the second half of 2016.

Stockland TownsvilleSold on behalf of Stockland Trust management


Leasing marketIncentives trending downThe improvement in market fundamentals over the past twelve months has resulted in elevated levels of lease renewals, which are supporting lower vacancy rates. On the back of the robust housing market upswing, large format retail sector rental growth has started to re-emerge into positive territory. Rentals in the large format retail sector have remained stable over the past six months, with select markets starting to see some upside in rents. There has however been a tightening in vacancy and an improvement in leasing demand which is likely to drive some rental growth over the next 12 months. This has seen vacancy rates steadily fall across

LARGE FORMAT RETAIL MARKET SNAPSHOTINDICATOR 1H 2015



Homemaker Prime Yield Range 7.50% - 8.75%

Homemaker Secondary Yield Range 9.00% - 10.50%

Big Box Prime Yield Range 6.00% - 7.00%

Big Box Secondary Yield Range 7.00% - 8.00%


Much of the retail growth story over the past 12 months has been driven by spending on household goods which increased eighty percent over the year to March 2015. According to the Large Format Retailer’s Association, the sector accounts for sales of $59.8 billion per annum nationally, and around 20 percent of all retail sales. The improvement in retail turnover in the household goods category has also improved demand for large format retail. While low interest rates and fuel prices should mean another strong year for retail turnover generally, the influence of higher house prices and strong residential construction activity will start to dissipate in 2016. However in the short-term the sector should still outperform.

There has been an increase in non-traditional large format retailers, expanding the pool of potential tenants. The sector has started to see new tenants emerging such as pet stores, baby accessory retailers, child care operators and gyms – traditionally not considered large format retailers. This provides owners the opportunity to expand their tenant base beyond the pool of traditional national chains, and remix and reinvigorate their centre offering. Overall tenant demand from national retailers has also improved. Retailers such as Harvey Norman, Beacon Lighting and Nick Scali have all recently reported strong trading results.

Housing sector drives growth

LARGE FORMAT RETAIL

First Half 2015


Masters Home Improvement, Wagga Wagga NSWLeasing on behalf of Hydrox Nominees Pty Ltd


Metro OfficeRETAIL

the sector nationally. Prime space is likely to see stronger growth than secondary grade space. Incentives remain a feature of the market, but have come down over the past six months. There is a significant difference between incentives levels in metropolitan and regional areas.

The limited supply of large format retail space is driving retailers to look at alternative tenancies outside of homemaker centres. We have seen a corresponding increase in demand for strip precinct locations and standalone sites. There has been strong demand from furniture retailers after little or no expansion during 2012 and 2013. In Victoria, demand has also picked-up from unconventional tenants such as medical centres, childcare operators, entertainment concepts such as trampoline centres. Demand from food and beverage operators looking to locate in homemaker centres has also improved.

We expect there could be further consolidation among retailers and suppliers across the household goods category. Earlier this year we saw the collapse of one of Australia’s biggest specialty retailers Homeart (previously known as Copperart). The company sold household items including electrical appliances and furniture goods had around 116 stores across Australia, all of which were closed. A number of independent home improvement retailers are also under pressure as Bunnings and Masters both continue to take market share.

Nationally, average gross rents for large format retail centres range between $200/sqm and $435/sqm, reflecting local conditions in individual markets. Across the country the national average gross rent for large format retail centres sits at $290/sqm.

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Investment marketInvestors chasing limited stockInvestor interest in the large format retail sector has seen very strong transaction activity over the past few years. Following

Home Central Bankstown, NSWManaged on behalf of Valad Property Group

two strong years of trading in the sector, activity slowed during 2014 due to a lack of stock put to the market. Record levels of sales were recorded in 2013 with over $1 billion worth of centres trading across 34 sales. Across 2013 and 2014 there were 52 large format retail centres sold; which means the availability of quality assets will be limited moving forward. Year-to-date in 2015 there has been five transactions of large format centres greater than $10 million totalling $124.6 million. Sales prices achieved during 2015 range between $13.5 million and $39 million. Sales across the last two years have been driven by institutional investors exiting the sector, which they came to view as non-core, but this trend has slowed markedly. The majority of these centres have been purchased by private investors, syndicators and unlisted funds, who remain the most active in the market.

The largest homemaker centre transaction so far in 2015 is the sale of Waurn Ponds Plaza in Geelong. A private investor purchased the 6,792sqm centre on a yield of 8.5 percent in April. The vendor was a syndicate of private investors from Western Australia. Tenants in the centre include Petbarn, Furniture Galore, and BCF. Demand for this type of centre with strong lease covenants and healthy weighted average lease expiries is solid, as investors take advantage of the significant spread between the low cost of debt and large format investment yields.


The largest big box transaction year-to-date 2015 is the sale of the newly completed Bunnings Warehouse in Maribyrnong. The BWP Trust purchased the property under the terms of the Warehouse Store Development Deed with Bunnings for a total consideration of $39.075 million in February. In June 2001 the BWP Trust acquired the 3.4 hectares of land for $7.1 million on which a Bunnings Warehouse was built and opened in mid-2013. As part of the deal a development fee of $31.98 million was paid, with the transaction reflecting a cap rate of 6.5 percent. The property has a total retail area of 17,551sqm and around 407 car parking spaces. The commencing annual rental income is $2.54 million on an initial fixed term of 12 years and further five optional terms of six years each. Under the lease, the rent increases by a fixed three percent per annum.

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According to IPD Commercial Property Digest, total returns for the large format retail sector increased 4.2 percent to 14.5 percent over the year to December 2014. Returns for this sector are now at their highest level since December 2007. Large format retail also recorded the strongest growth in annualised returns across all retail categories. This was driven by an improvement in capital growth at 6.1 percent; and steady but solid income growth of eight percent.

Further scope for yield compression Overall cap rates continue to firm for retail assets, with a significant improvement having occurred over the past 12 months. This has typically been led by higher yielding sectors such as large format retail. Over the first half of 2015 yields for large format assets have tightened, particularly at the top end of the yield range. Given the strengthening fundamentals of improving rental growth and a modest supply outlook, there is potential for further uplift in pricing, particularly for homemaker centre yields which are still sitting above their cyclical lows.

Prime yields for homemaker centres across Australia currently range between 7.5 percent and 8.75 percent, while secondary yields range between nine percent and 10.50 percent. Standalone hardware centres tend to achieve a much tighter yield than the rest of the large format retail sector, reflecting the long-term lease and covenant, which offers a secure income and hence

Hometown Warwick Farm, NSWLeasing on behalf of SB Investments Pty Ltd

lower risk. Prime yields for big box retail currently sit between six and seven percent, while secondary yields fall between seven and eight percent.

LARGE FORMAT RETAIL YIELD RANGE

6%

7%

8%

9%

10%

11%

NSW Vic Qld SA WA

Yiel

d (%

)


Supply and demandRisk of oversupply diminishesThe pipeline of new supply within the large format sector continues to be dominated by the hardware category although homemaker centres are also experiencing more positive market fundamentals. Despite improved trading conditions, the construction of large scale homemaker centres has been subdued of late and forecasts suggest this is unlikely to change over the next two years. This will support downward pressure on vacancy rates and rental growth. The supply of homemaker centres will remain low in 2015, with around 46,895sqm expected to be completed. The largest project


Metro OfficeRETAIL



is the new IKEA at Majura Park in Canberra. The 26,000sqm store will add to the growing retail precinct at Majura Park which welcomed Costco last year. The store will also include a 340-seat restaurant, a childcare centre, and a solar panel energy system that will generate up to a quarter of the energy consumed by the store. The supply of homemaker centres is expected to pick-up in 2016 with around 93,905sqm to be supplied across both new projects and expansions of existing centres.

Supply across the hardware sector continues to be strong with around 251,017sqm expected to be completed during 2015. Much of the new supply has been focused on single tenant buildings and not new homemaker centres, with most being design and construct projects, meaning they are occupied on completion. The pipeline over the next three years is weighted toward Queensland followed by New South Wales then Victoria.

Woolworths has nearly halved the number of new Masters’ stores opening after announcing the business is not expected to break even in 2016 as intended. Woolworths now plans to open between six and 11 Masters’ stores a year for the next few years – rather than the previously targeted 20 to 25 stores per year. As a result,

1618 Canterbury Road, Punchbowl NSWLeasing on behalf of SB Investments Pty Ltd

Woolworths has been carving up car parks and leasing sites to other retailers. Masters has reportedly sold land at half a dozen sites, such as Box Hill in Melbourne, and is offering sites as large as 500sqm to fast food operators and big-box retailers such as Repco, Petbarn and Super Retail Group’s BCF. In contrast, Bunnings recently report 9.4 percent store-on-store sales growth boosted by higher house prices. The company maintains its aggressive store rollout program, with around 40 stores expected to open over the next two financial years.

Continued focus on market share growth has seen both Bunnings and Masters recently purchase sites in South Sydney. Bunnings acquired a site in Tempe adjoining Australia’s largest IKEA store for a reported $22 million. The two-hectare site has development approval for a large format retail centre however Bunnings is expected to construct a brand new multi-level store. The existing 13,000sqm property is currently leased until 2018 however there is a 15-month demolition clause. Masters recently purchased a 23,000sqm site in Banksmeadow for around $25 million from Orica. A development application has been submitted for the site, which is in the early stages of planning. The property is close to Port Botany and Sydney Airport and is located about 12 kilometres from the Sydney CBD.


Our experience RETAIL

Accelerating success. Note: Figures calculated over an 18 month period from November 2013 to April 2015 across Australia and New Zealand. *Includes leased and ongoing projects ** Sales of assets $15 million and above only


Summerhill Shopping Centre Reservoir, Vic15,700m²

On behalf of Summerhill Shopping Centre Pty Ltd

Soul Surfers Paradise, Qld3,732m²

On behalf of Jupiter Holdings No. 15 Pty Ltd *Receivers & Managers Appointed

Tonsley Clovelly Park, SA364m²

On behalf of Renewal SA

580 George Street Sydney, NSW6,000m²

On behalf of GPT

Cottesloe Central Shopping Centre Cottesloe, WA400m²

On behalf of Primewest

118-124 Queen Street Auckland, NZ282m²

On behalf of a private investor

Northland Shopping Centre Preston, Vic$496 million (50% interest)

On behalf of Canada Pension Plan Investment Board

Mildura Central Mildura, Vic$109.74 million

On behalf of Federation Centres

The Block Arcade Melbourne, Vic$80 million


Mt Ommaney Centre Mt Ommaney, Qld$416.25 million

On behalf of AMP Capital Investors for ACPP

Apex Mega Centre Mt Wellington, NZ$64 million

On behalf of purchaser’s agent for Kiwi Income Property Trust

780 assets covering over

771,200 square metres*

leased

38 assets totalling over

$2.7 billion value**

sold

IN THE LAST 18 MONTHS

Stockland Townsville Aitkenvale, Qld$228.7 million (50% interest)

On behalf of Stockland Trust Management

5.3 million square metres totalling over

$29.7 billion worth in value

Our experience RETAIL AUSTRALIA AND NEW ZEALAND

Note: Figures calculated over an 18 month period from November 2013 to April 2015 across Australia and New Zealand. *Includes leased and ongoing projects ** Sales of assets $15 million and above only


Home Hub Castle Hill, NSW52,149m²

On behalf of LaSalle Investment Management

Bonnyrigg Plaza Bonnyrigg, NSW23,227m²

On behalf of LaSalle Investment Management

Home Central Shepparton Shepparton, Vic13,661m²

On behalf of Valad Property Group

Home Central Bankstown Bankstown, NSW16,976m²

On behalf of Valad Property Group

Norwest Marketown Norwest, NSW11,501m²

On behalf of Mulpha Australia

Westfield Parramatta Parramatta, NSW137,249m²

On behalf of Scentre Group Limited

Westfield Liverpool Liverpool, NSW85,239m²

On behalf of AMP Capital Investors Limited

Smithfield Shopping Centre Cairns, Qld29,428m²

On behalf of Dexus Funds Management Limited and SAS Trustee Corporation

Indooroopilly Shopping Centre Indooroopilly, Qld115,470m²

On behalf of Eureka Funds Management

Capalaba Central Shopping Centre Capalaba, Qld42,136m²

On behalf of Dexus Funds Management Limited and SAS Trustee Corporation

Northwest Shopping Centre Westgate, NZ27,500m²

On behalf of DNZ

valued

308 assets totalling over

1.51 million square metres

managed

IN THE LAST 18 MONTHS

Waitakere Mega Centre Henderson, NZ17,500m²



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Colliers International does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. Colliers International will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. © Colliers International 2015.

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Retail RFR First Half 2015