RESEARCH

SYDNEY CBD RETAIL MARKET BRIEF AUGUST 2015

International retailers continue to have a major bearing on Key Facts the CBD retail market, with a clear preference for The vacancy rate in the Sydney CBD retail Core has large super prime space. This has forced other retailers to declined to 3.3%, down from look further afield for suitable options. 4.1% 18 months earlier The growing presence of Retail Overview international retailers has forced existing retailers into secondary locations where House prices continue to have a major For the Sydney CBD, the continued arrival of vacancies previously existed bearing on the NSW retail market as a rise in international retailers, particularly in the form household wealth has supported sustained of ‘fast fashion’ from the likes of Uniqlo and The Sydney CBD retail Core high levels of retail sales growth. Following a Forever 21 has supported tenant demand remains dominated by clothing, relatively weak Christmas trading period, over the past 12 months. With domestic footwear & soft goods retailers (36.9%) retail turnover has improved over the six expansion prospects in Europe and North months of 2015 to record annual growth of America becoming increasingly limited, the Significant capital remains in 6.7% in the 12 months to June 2015. Also overall attractiveness of the Australian the market with retail strata contributing to the recent improvement was market for these retailers is favourable, sales over the first half of 2015 the February and May interest rate cuts and supported by a resilient local economy and totalling $66.1 million weakening petrol prices (despite the recent high discretionary spending. Looking ahead, rise), both of which increased household the continued rollout of apparel/footwear spending capacity. retailers is expected to persist, following in the footsteps of H&M and Zara who Despite some recent stabilisation, the continue to increase their presence across decline of the Australian Dollar is supporting the country. However, for the Sydney CBD, local retailers through a combination of the next two to three years is likely to be increased tourism numbers and less online characterised by the influx of luxury retailers. purchases offshore by consumers. The latter is highlighted by a moderate slowdown in Knight Frank Research has completed its LUKE CRAWFORD online retailing. According to the NAB Online 2015 Sydney CBD Retail Core survey Senior Research Analyst Sales Index, May 2015 online sales showed which highlights vacancy and tenancy annual growth of 9.0%, down from 14.3% in mix trends across the precinct. Follow at @KnightFrankAu September 2014.

SYDNEY CBD RETAIL CORE SURVEY

Vacancy 18 months ago at 3.5%. However, it is footwear & soft goods weight is far evident that certain precincts have had a greater within CBD Shopping Centres at greater pull in attracting new tenants. The 45.3%. Within other retail formats, the As at July 2015, the vacancy rate in the luxury strip, which primarily runs along dominance is less pronounced, Sydney CBD retail Core has declined to and houses the likes particularly Street Frontages where 3.3%, down from 4.1% 18 months of Prada, Gucci and Chanel is extremely clothing, footwear & soft goods retailers earlier. The presence of international tight with no vacant space running from represent only 29.4% of shops. retailers seeking prime retail space has to the north and Market been the main catalyst, as it has forced Street to the south. The precinct’s The second most dominant retail type in some retailers to look beyond the Super attractiveness for luxury retailers is the CBD retail Core is food retailing Prime retail Core (see back page for accentuated by Cartier leasing the (17.4%), closely followed by personal definition). This displacement has meant previously vacant space at 74 retailing (14.7%), the bulk of which were that some previous vacancies in Castlereagh Street. The high end retailer watch and jewellery retailers. secondary locations have now been will move from the MLC centre in the absorbed. For example, Uniqlo’s coming months and will occupy circa Over the past 18 months, the growing occupancy of all but a café on level 1 at 1,000m² across three levels at the new popularity of food retailing, particularly in the Mid City Centre has forced 18 flagship store. specialised food, saw its market share retailers to look for alternative premises, increase from 14.1% to 17.4%. This is in while Forever 21 has forced three major Similarly, George Street which line with the solid turnover growth retailers to look elsewhere for a new accommodates a mix of luxury, clothing recorded in takeaway, cafes and premises. and personal retailing (including Burberry restaurant retailing across the state, and Louis Vuitton) has recorded a modest averaging 16.3% per annum over the fall in the vacancy rate to 2.0% (down past two years; compared to 7.7% for TABLE 1 Sydney CBD Retail Core from 2.4%). This reduction was the result total retail turnover in NSW over the Vacancy by retail type (%) of a modest rise in tenant demand, same period. particularly from personal goods retailers Jan-14 Jul-15 (including mobile phones and Currently a number of centres and (%) (%) accessories). arcades are undergoing refurbishment in Arcades/Laneways 4.5 3.2 response to a greater focus on the Despite a considerable increase in ‘experience’ side of retailing. At the same Street Frontages 3.5 3.5 international retailer demand, Shopping time, to accommodate further Centres have experienced a small international retailer expansions into the Shopping Centres 2.9 3.3 increase in their vacancy rate from 2.9% Sydney CBD, a number of centres have Total Retail Vacancy 4.1 3.3 to 3.3%. The bulk of the available space recently completed or are in the process at centres within the CBD retail Core are of refurbishment for such retailers. The Source: Knight Frank Research small and in inferior locations which do recent completions include the Sydney *For definition of CBD Retail Core, see back page not offer the appropriate size or frontage Arcade and The Galleries for Forever 21 for retailers seeking flagship stores. (June 2015) and MUJI (May 2015) The largest reduction in the vacancy rate respectively, while the over the past 18 months was recorded in Tenancy Mix & New Centre is currently undergoing works to Arcades, falling from 4.5% to 3.2%. accommodate H&M and Zara Home. Arcades, which in past years have had Supply difficultly in leasing the top floors, are Beyond this, a number of mixed use now close to full occupancy. This result The retail tenancy mix in the Sydney CBD buildings are undergoing refurbishment/ has been supported by the expansion of retail Core remains dominated by redevelopment and will contain retail existing tenants, while the growing clothing, footwear & soft goods retailers, tenancies. This includes 5 Martin Place, shortage of available leasing options in while the proportion differs somewhat by 20 Martin Place, 333 George Street and the Super Prime retail Core has augured location and retail type. Overall, clothing, 383 George Street. In addition, a number well for other centres and arcades as footwear & soft goods retailing represents of properties are currently upgrading tenants have been forced to look further 36.9% of all retail shops within the CBD their food and beverage offering within afield for suitable options. retail Core, largely in the form of women's their food courts including the MLC clothing (12.0% of total) and other Centre, Square/ Governor Place While churn has occurred, the vacancy clothing retailing (10.7% of total) which and Gateway. rate for Street Frontage shops has incorporates unisex retailers like Zara and remained on par with the level recorded Topshop/Topman. However, clothing,

2 SYDNEY CBD RETAIL AUGUST 2015 RESEARCH

FIGURE 1 FIGURE 2 with the momentum in the broader retail Sydney CBD Prime Core Retail Sydney CBD Core Retail Rental market flowing through to increased Tenancy Mix Ranges by Type demand for CBD retail strata space. With % of number of shops by type $ per sq.m—Gross fewer assets being brought to the market

100% $15,000 at a time when capital flows are at

90% historical highs, investors are becoming

80% $13,000 more aggressive in their approach to 70% secure assets. In turn, yields have 60% $11,000 tightened, with recent strata sales selling 50% in the 4.0% to 5.0% yield range on 40% $9,000 average. 30% 20% $7,000 During CY2014, CBD retail (strata) sales 10% totalled $90.1 million, 16% of which was 0% $5,000 Street Arcades Shopping located along , 11% on Frontages Centres Castlereagh Street and a further 9% on CLOTHING, FOOTWEAR & SOFT GOODS OTHER $3,000 SERVICES Castlereagh George Pitt Street Martin Place, underpinned by the sale of PERSONAL RETAILING Street Street Mall DEPARTMENT STORES FOOD RETAILING 1/53 Martin Place (Lindt Café) for $8 FITOUT/UNDER DEVELOPMENT VACANT Source: Knight Frank Research million. Assets priced below $4 million Source: Knight Frank Research dominated sales volumes, accounting for In recent months, a number of lease 58% of the total volumes and 81% of Tenant Demand & deals have occurred which will place assets exchanged. Asian investors have further downward pressure on the CBD been the most active players in the Rents retail Core vacancy rate over the next 12 market, with 80% of analysed Sydney months. This includes Microsoft and CBD retail (strata) transactions for The persistent demand from overseas Sephora at , Mimco at CY2014 stemming from Hong Kong retailers seeking prime space within the the Mid City Centre and undisclosed investors. CBD retail Core has continued to tenants at 333 and 383 George Street underpin leasing activity in the Sydney respectively. While only a limited number of retail strata CBD. While demand is high, a lack of investments have exchanged during 2015, suitable options which offer the scale and a number of large sales have occurred appropriate street frontage has curtailed Investment Activity which has pushed sales volumes to $66.1 activity to some extent, with a number of million for the first half of 2015. The most international retailers waiting significant Despite a lack of retail strata space notable being the former Darrell Lea retail periods until suitable options become available for sale, transaction volumes in shop (now tenanted by Telstra) at 396 available. This was the case with H&M the Sydney CBD have remained steady, George Street for circa $26.2 million. which spent four years seeking to enter the Sydney CBD, before securing TABLE 2 5,000m² at the Glasshouse Centre. Recent Sales Activity Sydney CBD Retail

2 2 Despite the lack of available leasing Address Price ($m) Initial Yield (%) GLAR (m ) $/m GLAR Sale Date options, rental rates in the Sydney CBD Shop 2, 57 York St $2.97 3.90 78 $38,115 Jul-15 have remained relatively stable over the Shop 1, 57 York St $2.34 4.05 59 $39,661 Jul-15 past 12 months, while moderate rental growth has occurred in both the CBD Shop 181, 569 George St $5.64 4.32 85 $64,500 May-15 retail Core and the Super Prime retail Shop 2, 70 Pitt St $2.16 6.34 19 $113,684 Apr-15 Core. Depending on location and 234 George St (Pie Face) $4.03 5.10 55 $73,182 Apr-15 frontage, the rental range and recent growth varies significantly. Gross retail TABLE 3 rentals in the Super Prime retail Core Recent Leasing Activity Sydney CBD Retail which encompasses Address Tenant Gross Rent $/m2 GLAR Term Lease Date currently ranges from $10,000/m² to $15,000/m², while a selected number of Mid City Centre Mimco 15,000* 85 6 Jun-15 recent leases have been above $15,000/ 99 Pitt St Westpac 3,750* 2,700 7+5+5 Jun-15 m². For premises outside the Super Prime retail Core, gross rental rates currently 254 George St Bankwest 3,000* 232 10+10 Feb-15 average between $4,000/m² and $7,000/ 147 King St Franck Muller 4,000* 75 5+5 Feb-15 m² (see Figure 2), while secondary retail Westfield Sydney Sephora N/A 560 N/A Dec-14 premises achieve gross rents in the range of $1,000/m² to $3,000/m². Source: Knight Frank Research *Approx.

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RESEARCH Outlook Luke Crawford Senior Analyst Looking ahead, demand for retail space With the bulk of recent refurbishments +61 2 9036 6629 within the Sydney CBD retail Core is and new developments being pre-leased [email protected] expected to strengthen over the next 12 (e.g. H&M and Zara Home at the months, stemming from the continued Glasshouse Centre), any further demand Bradley Rehn displacement of retailers in and around from both local and international retailers Assistant Analyst the Super Prime retail Core. However, will place upward pressure on rental +61 2 9036 6656 [email protected] unlike previous years where the rates, particularly until forthcoming displacement was underpinned by ‘fast supply along George Street in Matt Whitby fashion’ retailers seeking large prime conjunction with completion of the light Group Director space, the next two to three years will be rail project. In this case, the current gap Head of Research and Consultancy supported by new and existing luxury between Pitt Street Mall and George +61 2 9036 6616 retailers looking for ‘flagship sites’, Street rents are likely to narrow, with [email protected] including Kering, Richemont and LVMH several large apartment projects Group amongst others. boosting the local population and foot NSW traffic along George Street, and hence Richard Horne demand for retail space. Managing Director, NSW +61 2 9036 6622 [email protected]

VALUATIONS Matthew Russell National Director +61 2 9036 6619 [email protected]

RETAIL LEASING Alex Alamsyah Senior Director - Retail Leasing Retail Core Definitions: +61 2 9036 6693 Knight Frank’s survey covers the key CBD retail precinct as defined as the Core. The CBD [email protected] retail Core includes all retail premises within the broad boundaries of Martin Place to the North, Park Street to the South, Castlereagh Street to the East and George Street to the West. Michael Hanscomb The Super Prime retail Core, home to the recent influx of international retailers encompasses Director - Retail Leasing the Pitt Street Mall. +61 2 9036 6739 [email protected]

Knight Frank Research provides strategic advice, consultancy services and forecasting RETAIL SALES to a wide range of clients worldwide including developers, investors, funding Ben Stewart organisations, corporate institutions and the public sector. All our clients recognise the Director - Sales +61 2 9036 6625 need for expert independent advice customised to their specific needs. [email protected]

Andrew Palmer RECENT MARKET-LEADING RESEARCH PUBLICATIONS Senior Sales Executive +61 2 9036 6646 [email protected]

Melbourne CBD Sydney Residential Australian Retail Asia Pacific Capital Retail Market Brief Market Update Market Overview Markets Report August 2015 July 2015 February 2015 May 2015

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