What do Zara, H&M, Uniqlo and Topshop have in common when it comes to doing business in Australia?
Melbourne.
Melbourne has emerged as Australia’s premier location for international retailers, according to the new Australian Property Institute (Vic) Retail Update, in conjunction with Colliers International and Fitzroys.
API (Vic) President Aldo Galante said Melbourne’s CBD is the current major attraction to foreign retailers looking to make their mark down under.
“The new Myer Emporium’s official opening in August, coinciding with the opening of TopShop and now Victoria’s Secret, and the opening of H&M at the GPO Building will provide a further boon for the CBD’s main strips in Collins Street, Swanston Street and the QV offering,” he said.
He said that Melbourne’s strips were stabilising after a strong period on both the sales and leaning fronts.
Major asset transactions
Investors with their sights on major Australian retail assets have built up a considerable war chest.
Colliers International National Director, Research Nerida Conisbee said it was estimated there is in excess of $10 billion of available capital, both domestically and internationally, chasing major retail centres in Australia.
“This is on the back of investment activity in the retail sector reaching record levels in 2013, with $7.35 billion worth of property sold across the nation.”
Conisbee said there continues to be a high degree of competition for quality retail assets, particularly for core and core-plus product.
“Records continue to be set in 2014, with the largest single asset transaction so far this year being the sale of a 50 per cent share in Melbourne’s Northland Shopping Centre for $496 million. This is Australia’s biggest post-GFC shopping centre transaction,” she said.
“The deal highlights the growing demand for ‘fortress-style’ assets, with limited opportunity to purchase assets of this size and quality.”
National CBD retail
National rental growth in the CBD precincts was varied during 2013.
Overall, national retail CBD rents have grown by just two per cent for the year.
“This is unsurprising given the softness in discretionary spending that was experienced during the first eight months of 2013, and below average levels of consumer confidence,” Conisbee said.
She said all Australian markets have witnessed increasing incentives over the last three years.
“It was not uncommon in 2011/12 to see no incentives on offer within the CBD precincts. However, current incentives across CBD retail are now reaching as high as 20 per cent, although the most common range is 10-15 per cent.”
Melbourne leading Australian CBD retail markets
The opening of the Myer Emporium and H&M store in the GPO building has seen Melbourne emerge as the premier location for international retailers.
“By the official opening we will have seen international majors TopShop, Victoria’s Secret, Calvin Klein, Uniqlo, Adidas, and a host of others having opened their doors in the complex.”
Current average gross rents for prime Melbourne CBD space are $7,750 per sqm, with super prime positions fetching upwards of $9,000sqm.
The most recent major transaction in the Melbourne CBD was the sale of the iconic Block Arcade for circa $100 million in April 2014.
Conisbee said the Block Arcade, constructed in in 1892, and is a prestigious retail shopping centre with upper level commercial accommodation and a total NLA is 8,142sqm.
It was sold to a private local family who already hold significant retail property interests in the Melbourne CBD.
“Following the completion and opening of Emporium and the H&M store, the next major supply addition in the Melbourne CBD market will be the fully refurbished 260 Collins Street, to be known as St. Collins Lane.
All tenancies within the existing centre have now been vacated, and the building is undergoing a $30 million refurbishment by its owner, LaSalle Investment Management.
“Floor space will increase from 7,799sqm to 9,000sqm, and is expected to be completed by early 2016. The tenancy profile will reduce from the previous 100 tenancies to 60 tenancies over three levels."
Fitzroys Director Ray Berryman said that Emporium will prove to be a missing link in the Melbourne CBD’s retail landscape once fully launched in August.
“Emporium will power the CBD retail rather than drain the competition.
"In recent weeks we’ve seen Australian fashion icon Gorman take up space on Swanston Street, as well as Japanese eatery Sakura Kaiten Sushi take out a new lease directly opposite Emporium on Lonsdale Street.
“Other retailers such as Italian labels Gucci and Emernegildo Zegna have both recently announced expansions of the CBD presence.
“There is anticipation that Emporium may instead have an impact on destinational majors, such as Chadstone Shopping Centre, but not the typical suburban strips,” he said.
“Destinational majors continue to evolve, however, and this is vital in attracting some big-name retailers.”
Uniqlo has just leased 1,132sqm at Chadstone after opening their flagship store at Emporium, following CFS Retail Property Trust gaining approval in May for the $580 million expansion of the shopping center.
The new-look Chadstone will grow by 34,000sqm, with 44 more shops including a bigger luxury offering with up to five international flagship stores of 11,000sqm.
Meanwhile, Eastland in Ringwood will undergo a $575 million plan to double in size to 127,000sqm, with David Jones committing to 11,000sqm over 15 years for its anchoring tenancy amongst 150 new specialty retailers.
It has been over one year since GPT officially opened the $300 million Highpoint Shopping Centre expansion in the city’s west, which added a new David Jones department store as well as Topshop and Zara outlets.
Melbourne suburban strips
Berryman said there are still international retailers not looking exclusively at the CBD but suburban strips also, with Marimekko, Diesel and West Elm for instance all recently taking space in the Chapel Street precinct.
“The suburban strips have recently gone through a strong period, with a pick up in leasing. However the next quarter will probably see leasing come off in suburban strips as tough economic conditions continue to have an effect.
“Strips with rents typically between $40,000 and $60,000 per annum will be more likely to remain stable, whilst higher rent strips such as Chapel Street, South Yarra will probably be more volatile,” Berryman said.
There are some local chains also considering further expansion, however.
“As in the CBD, there has been a shift in enquiry from food-based retailers back to fashion and discretionary throughout the suburbs, with discretionary spending witnessing some increase.”
Berryman said the sales market is likewise coming a healthy period, with strong results on the back of improved investor sentiment.
“Stock has been well-received with competitive sales processes. Supply has been constrained, especially in the premium strips which have been very tightly held since the beginning of 2013, and will remain so throughout this year.”
In 2013 there were no sales registered in Puckle Street, Moonee Ponds and Malvern Road, Hawksburn Village, whilst there were only two sales registered in Acland Street, St Kilda; Toorak Road, Toorak and Douglas Parade, Williamstown.
There were only three sales in the blue-ribbon locations of Church Street, Brighton and Glenferrie Road, Malvern.
Church Street, Brighton saw sale yields as low as 2.6 per cent last year, and this year has consistently seen tight yields again of 3.1 per cent and 3.7 per cent.
“Demand from local and overseas investors is evident, seeking well-located retail investment assets throughout Melbourne.”
Berryman said that many offshore interests will continue to look beyond the CBD and seek chiefly high-yield opportunities and investment grade stock opportunities, whilst local buyers will remain aggressive and accept tighter returns.
“Just in the past fortnight an offshore investor snapped up a double-height Toorak Village retail shop that Fitzroys put to auction, tenanted by fashion retailer Christensen Copenhagen, for $1.848 million reflecting a healthy 5.6 per cent return.”