RESEARCH SYDNEY CBD RETAIL MARKET BRIEF JULY 2016 The vacancy rate in the Sydney CBD retail Core has Key Facts tightened to 1.8% as at July 2016, underpinned by demand The vacancy rate in the Sydney CBD retail Core has from upmarket international retailers. Retail conditions have compressed to 1.8%, down been supported by the booming tourism sector in NSW. from 3.3% 12 months earlier. 3.6 million tourists visited NSW Retail Overview sector have been the key catalysts driving in the 12 months to March 2016 NSW retail performance. Despite some and their spend increased by a Australian retail conditions continue to mirror moderation recently, dwelling construction record 20% to $2.6 billion. the country’s multi-speed economy. activity in the State remains above the long- Nationally, the latest ABS data in May 2016 term average, with high-density housing in An influx of luxury and shows retail sales grew by 3.4% yoy, slightly Sydney being the driver of this growth. The upmarket international retailers down from 3.5% in the prior corresponding number of international visitors to NSW, is boosting demand for prime period and 4.8% a year earlier. This mostly from Mainland China, in the 12 sites in the CBD retail Core. represents a MAT (Moving Average months to March 2016 increased by 8.9% Turnover) growth rate of 4.0% pa, below the The Sydney CBD has and visitor spend increased by a record experienced strong levels of 10 year trend growth rate of 4.5% pa. 20%. NSW not only attracts more tourists investment over the past 12 but wealthier ones as well. months, with over $873 million In contrast, NSW remains the retail worth of retail assets transacted. powerhouse of the country supported by a This strong inbound tourism has translated strong state economy, registering a retail to positive trade conditions and leasing MAT growth rate of 5.0%, significantly demand within the Sydney CBD, with above the national average as well as the international retailers intensifying the long-term growth rate. The favourable competition for prime locations. Whilst the economic conditions in the State is further market last year was dominated by fast- reflected in the positive performance of fashion brands, this year has seen an influx discretionary sales, growing at almost of luxury and upmarket international retailers double the rate of non-discretionary sales. securing sites in the CBD retail Core. ALEX PHAM Whilst the historic low interest rates and Knight Frank Research has completed its Senior Research Manager favourable exchange rates continue to 2016 Sydney CBD Retail Core survey support retail sales nationally, the strong which highlights vacancy and tenancy Follow at @KnightFrankAu housing activity and a booming tourism mix trends across the precinct. SYDNEY CBD RETAIL CORE SURVEY Vacancy COS, an upscale sister brand of H&M, category within clothing, but we have and Canadian apparel brand Kit & Ace noticed an increase in Unisex clothing taking up the ground floor at the former retailers over the last 12 months with the The vacancy rate in the Sydney CBD Commonwealth Bank Building at 5 Martin arrival of additional unisex brands such retail Core has declined to 1.8% as at Place. At 20 Martin Place, American as Muji, COS and Kit & Ace. July 2016, from 3.3% 12 months earlier. electric carmaker Tesla has just opened The influx of international retailers amid their first flagship showroom in Australia, The majority of clothing and footwear limited availability of flagship sites has which bears some resemblance to an shops (51.1%) are located in shopping been the key driver of the decline in Apple store. centres. Clothing and footwear retailers vacancy levels this year (Table 1). tend to congregate within an enclosed Consequently, street frontages In response to the increasing pressure environment as shoppers prefer to experienced the tightest vacancy level as from international players, a number of browse around a variety of options well as the largest yearly decline, with the local retail chains have raised their game before making their purchasing decision. vacancy rate contracting to 1.5% as at to remain in the City Core market. At the This is in contrast to the luxury watch July 2016 from 3.5% a year earlier. Mid City Centre, Australian-owned Mimco and jewellery retailers, who prefer and Just Jeans have recently opened standalone locations, particularly along Among the major luxury flagship deals their flagship stores whilst Forever New Castlereagh Street and King Street. over the last 12 months are upmarket and Sheike are also revamping their jeweller Cartier moving from MLC Centre flagship stores. Cotton On Body and Food retailing is the second most to a triple-storey flagship store at 74 Typo, both owned by Melbourne-based popular retail category in the CBD with a Castlereagh Street and Swiss Cotton On Group, are expanding at market share of 17.2% as at July 2016. watchmaker Franck Muller launching their Westfield Sydney. These deals saw the The majority of them are located in Shopping Centre vacancy rate dip to shopping centres (24%) and arcades TABLE 1 Sydney CBD Retail Core 2.3% July 2016 from 3.3% in July 2015. (15%), in which they help to drive foot Vacancy by retail type (%) traffic into the centres. The number of Arcade and Laneway shops have also gourmet and casual dining options Jul-15 Jul-16 experienced positive absorption, focusing on providing the “experience” (%) (%) underpinned by new boutique brands and continue to rise across the CBD. Street Frontages 3.5 1.5 specialty food services. The QVB has Nevertheless, competition in this sector attracted a cohort of new boutique is extremely high and so is the churn rate Arcades/Laneways 3.2 1.5 international brands including Parisian compared to the other categories. shirt maker Anne Fontaine, Malaysia- Shopping Centres 3.3 2.3 based pewter manufacturer Royal New supply of retail space is expected to Total Retail Vacancy 3.3 1.8 Selangor and Japanese cosmetic chain come from a number of mixed-use Shu Uemura. New additions in The developments in the CBD including Source: Knight Frank Research Galeries include healthy and alternative Charter Hall’s 333 George Street and Fife *For definition of CBD Retail Core, see back page food offerings such as SumoSalad Green Capital’s York & George. Construction at Label, Soul Origin and The Grounds in 333 George is approaching completion first Sydney store at 147 King Street. The the City, a spinoff of The Grounds of with two banks; NAB and HSBC, having influx of luxury retailers is showing no Alexandria. Consequently, the vacancy already pre-committed to the retail sign of slowing this year with Chopard rate for Arcades and Laneways has podium. CBA is also moving to the newly setting up a flagship store at the newly declined from 3.2% in July 2015 to 1.5% developed 200 George Street (outside of refurbished building at 119 King Street in July 2016. our survey area). These deals, together and upmarket jeweller Van Cleef & Arpels with ANZ repositioning at 20 Martin expected to open at 112 Castlereagh Tenancy Mix & New Place, have highlighted the re- Street. Tiffany & Co is also eyeing an engagement of banks to prime retail sites undisclosed location in the Retail Core for Supply in the CBD after being driven out by their relocation from 39 Martin Place, fashion brands in the past. This time, which will be acquired by the State Clothing, footwear & soft goods retailers however, they are returning with a fresher Government for Sydney Metro continue to dominate the retail tenancy look with their retail store concept construction. mix in the CBD, representing 39.5% of all featuring cutting-edge interactive and shops within the CBD retail Core as at touchscreen technology, bigger and The rejuvenation of the retail precinct at July 2016. Their market share has more open space for the customers. Martin Place has also been well received increased from 36.9% a year earlier. by international retailers with Swedish Female clothing remains the largest sub- 2 SYDNEY CBD RETAIL JULY 2016 RESEARCH FIGURE 1 FIGURE 2 City Centre (75% to Hong Kong’s Cheng Sydney CBD Prime Core Retail Sydney CBD Core Retail Rental Family by Fortius) and World Square (50% Tenancy Mix Ranges by Type to ISPT by Brookfied) for $320 million and % of number of shops by type $ per sq.m—Gross $285 million respectively— reflecting tight 100% $18,000 initial yields of sub-5%. 90% $16,000 80% Mid City Centre, home to retailers $14,000 70% including Japanese clothing label Uniqlo, 60% $12,000 50% British fitness club Virgin Active and 40% $10,000 Australian Rebel Sport, achieved a rate of 30% $45,366/m². On the southern end of town, $8,000 20% World Square, a primarily restaurant/food 10% $6,000 centric precinct, sold for $32,838/m². 0% Street Arcades Shopping Total $4,000 Frontages Centres CLOTHING, FOOTWEAR & SOFT GOODS $2,000 A number of major retail assets in the FOOD RETAILING PERSONAL RETAILING retail Core are expected be transacted OTHER $- SERVICES DEPARTMENT STORES Castlereagh George Pitt Street over the coming months. The sale of FITOUT/UNDER DEVELOPMENT Street Street Mall VACANT David Jones store on Market Street is Source: Knight Frank Research Source: Knight Frank Research close to completion, with Scentre Group reportedly being the frontrunner. Most recently, 119 King Street, a Scentre’s interest was anticipated, as its Tenant Demand & particularly narrow building cornering Pitt neighbouring Westfield Sydney is already Street Mall, has been leased to linked to the Market Street site.