savillsresearch spotlight sydney cbd retail q4 2013

Savills Research New South Wales

Spotlight Sydney CBD Retail March 2014

Highlights Major International fashion labels are considering the

Australian market and seeking flagship prime locations outside the Prime Retail Precinct of the Sydney CBD

The overall vacancy rate for Sydney CBD retail increased to 2.6 percent in the last six months, up from 2.4 percent

Despite the increase in vacancy, Sydney CBD is still the standout performer when compared to other capital city vacancy rates

Clothing, Footwear and Accessories is the dominant category in the CBD survey, followed by Cafes, Restaurants and Takeaways

There has been significant increase of pop-up stores occupying vacant prime retail shops in the last 12 months

The upcoming pedestrianisation of George Street will create opportunities for more prime retailing within the Sydney CBD

Savills Research | Sydney CBD Retail March 2014

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Savills New South Wales Team Research

Divisional Director Simon Hemphill +61 (0) 2 8215 8892 [email protected]

Analyst Monir Shahbake +61 (0) 2 8215 8872 [email protected]

Managing Director Retail Investments

Managing Director Simon Fenn +61 (0) 2 8215 8830 [email protected]

National Director Steven Lerche +61 (0) 2 8215 8929 [email protected]

Retail Services Retailer Representation

Divisional Director Leighton Hunziker +61 (0) 2 8215 8838 [email protected]

Tenant Representative Natalie Muir +61 (0) 2 8215 8805 [email protected]

Retail Leasing Retail Management Executive

David Kleiner +61 (0) 2 8215 8820 [email protected]

Divisional Director Thomas Brown +61 (0) 2 8215 8893 [email protected]

Valuation & Consultancy Divisional Director

Andrew Johnston +61 (0) 2 8215 8853 [email protected]

Senior Valuer Lucas Forbes +61 (0) 2 8215 8990 [email protected]

Project Management Corporate Real Estate

General Manager David Nicholas +61 (0) 2 8913 4813 [email protected]

Divisional Director John Mackenzie +61 (0) 2 8215 8982 [email protected]

Savills New South Wales Level 7, 50 Bridge Street Sydney, NSW 2000 Australia +61 (0) 2 8215 8888 savills.com.au



Introduction

Prime retailing in the Sydney CBD comprises a diverse mixture of convenience, tourism, high end fashion, cultural, civic and entertainment retailing. It reflects the vibrancy and diversity of its customers that live, work and visit the city.

The latest employment levels across the City of Sydney LGA totals approximately 242,079 persons, of which white collar workers comprise 222,515 (Deloitte Access Economics, 2013). The resident population of Sydney was estimated at 183,500 people in 2011 by the NSW Government. This is forecast to grow to 201,900 persons by 2016 and to 236,100 persons by 2021. The majority of this population is expected, as is the current trend, to be made up by professionals under the age of 50. This increase in population will generate high levels of demand for retail.

In addition to residents who live in the city, there are also residents and visitors who live and stay in the wider Sydney metropolitan area who venture into the City for entertainment and shopping, and to enjoy the cultural opportunities that Sydney has to offer.

The Sydney City Council’s most recent space use survey reports retail and leisure activities occupy 7 percent of the total floor space in the CBD outlined in the table below.

Sydney CBD Internal Floor Space by Space Use Division

Space Use Internal Floor Space (sq m)

% of Total Internal Floor Space

Office 7,514,983 22.0

Shop/Showroom 921,158 2.7

Entertainment/Leisure 779,262 2.3

Restaurant/Eating 623,692 1.8

Other 24,361,084 71.2

Total 34,200,179

Source: City of Sydney 2006

Savills analyses prime retail in the Sydney CBD according to precincts as detailed below:

Precincts

CBD Prime Retail Precinct Bounded by Martin Place, Castlereagh Street, Market Street and George Street

Core Castlereagh Street, Martin Place, George Street and Pitt Street – outside of the Prime Retail Precinct

Rocks George Street (Rocks end) and Hickson Road

King Street Wharf King Street Wharf and planned development in Barangaroo

Southern South end of George Street

Source: Savills Research

Retail tenancy types are referred to throughout this report, definitions of which can be found at the end of this report.



Major Retail Centres

Centre Address

Shops

(No)

GLAR

(sq m) Owner

201 Elizabeth Street Cnr Park St & Elizabeth St 9 1,264 DEXUS Property Group / Perron

233 Castlereagh 233 Castlereagh St 24 1,263 GDI Property Group

52 Martin Place 52 Martin Pl 22 2,194 QIC Real Estate

580 George 580 George St 27 3,171 The GPT Group

Australia Square 264 George St 21 1,576 The GPT Group / DEXUS Property Group

Chifley Plaza 2 Chifley Sq 45 4,995 GIC

Circular Quay Retail Circular Quay 19 1,985 Rail Corporation NSW

Gateway Quayside 1 Macquarie Pl 22 2,163 DEXUS Wholesale Property Fund

Glasshouse Shopping Centre 150 Pitt St 24 3,623 Investa / Stockland

Hunter Connection 7 Hunter St 55 2,069 Strata

Market City 9-13 Hay St 127 15,061 Jen Retail Properties Ltd

Metcentre 273 George St 84 5,741 Mirvac Property Trust / MTAA

Mid City Centre 197 Pitt St 41 9,109 Fortius / Lend Lease (APPF Retail)

MLC Centre 19-29 Martin Pl 58 6,228 The GPT Group / QIC Real Estate

No 1 Martin Place 1 Martin Pl 8 3,024 AUSCO Martin Pty Ltd

Number One D1XON 1 Dixon St 63 6,847 Strata Plan

Queen Victoria Building 455 George St 180 13,669 Ipoh Pty Ltd

St James Centre 107-111 Elizabeth St 17 2,548 Tanert Pty Ltd

Stockland Piccadilly 210 Pitt St 43 5,649 Stockland

Strand Arcade 412-414 George St 77 4,837 Ipoh Pty Ltd

Sussex Centre 401 Sussex St 46 1,582 Ambadell Pty Ltd

The Galeries 500 George St 68 14,050 Barroham Pty Ltd / Abrocoona Pty Ltd

The Rocks Centre Cnr Playfair St & Argyle St 16 1,197 Sydney Harbour Foreshore Authority

The Wintergarden 1 O'Connell St 11 406 Harina Company Ltd / Lend Lease

Town Hall Square Cnr Kent St & Bathurst St 38 3,180 Glebe Administration Board

Wentworth Connection 61-101 Phillip St 16 2,050 City Freeholds

Westfield Sydney Cnr Pitt St Mall & Market St 310 88,912 Westfield

World Square Shopping Centre 644 George St 99 16,181 Brookfield / AWPF Management No. 2 Pty Ltd

Wynyard Railway Concourse Cnr George & York St 39 3,111 Rail Corporation NSW

Wynyard Walkways 301 George St 77 3,039 Sovereign Wynyard Centre Pty Ltd

Total 1,686 230,724

Source: SCD 2013 / Savills Research



Retail Development

Prime retailing within Sydney CBD underwent a significant transformation over the last couple years, particularly within the Core precinct, with the Westfield Sydney re-development and the completion of Mid City Centre. Despite the economic conditions at the time of construction, these projects went ahead whilst others froze in the development pipeline. More recently, Darling Quarter completed in the Western Corridor of the Sydney CBD, adding tourist amenity retailing to the area, as well as the retail offering at 161 Castlereagh Street.

There have been relatively few new projects announced in the Sydney LGA (Local Government Area) over the last two years. Of those that have been, most have been within the Sydney CBD and are part of office, retail or residential mixed use developments.

The success of these CBD developments can be seen through the increased pedestrian activity through Pitt Street Mall and surrounding streets since their opening. Pitt Street Mall maintains its position as Sydney’s premier shopping destination after existing as a construction site for a long period of time. Shoppers who ventured to fringe and outer suburbs in search of retail variety are now returning to the city.

Current Sydney CBD Retail Development Activity

Property Precinct Type New Extension Refurb Status Completion

48-50 Martin Pl Prime CBD 2,000 Construction 2014

International Towers Sydney – T3 King Street Wharf CBD 5,315 Construction 2015

Central Park (Frasers) Southern CBD 5,000 Construction 2015

York&George, 383 George St Core CBD 4,200 DA Approved 2015

20 Martin Pl Prime CBD 3,000 DA Approved 2015

5 Martin Pl Prime CBD 2,500 Construction 2015

International Towers Sydney – T2 King Street Wharf CBD 2,350 Site Works 2015

333 George St Prime CBD 2,000 DA Approved 2015

Barangaroo R8, R9, Hickson Rd King Street Wharf CBD 2,100 Early Planning 2016+

331-333 George St Core CBD 2,000 DA Approved 2016+

City One, 289-307 George St Core CBD 9,700 Early Planning 2019

Source: Cityscope / PCA / Reed Construction Data / Savills Research

Other developments in the city that will impact retailers include the reconfiguration, including pedestrianisation, of George Street to support light rail. Whilst it may be disruptive for retailers during the development phase, it will reinforce George Street as the main transport corridor for pedestrians in the city and benefit business in the long run.

The City of Sydney has set aside $220 million to improve transport and the environment and “open up better street-level business opportunities”. The development of laneways should broaden the retail offering available in Sydney, and enhance the city experience for tourists and residents alike.

The Chinatown Public Domain plan also has the potential to enhance the area with more open space, creating a pedestrian plaza for markets and outdoor dining.

The City of Sydney is also working with smaller retailers, providing grants to encourage development of laneways and small business to provide a greater depth of retail experience in the Sydney CBD and its villages. In addition, they have created a Retail Advisory Panel ‘to identify and create opportunities for CBD retailers’.

Other redevelopment projects within the Sydney CBD that are currently mooted include; 19 Martin Place, 55 Market Street, 345 George Street, 388 George Street and 400 George Street.



CBD Tenancy Mix The ‘Prime Retail Precinct’ (as defined on page 3) in the Sydney CBD is focused along the pedestrianised portion of Pitt Street Mall, and in more recent times George Street; with high end fashion found in centres and in historic stand alone accommodation in King Street, Castlereagh Street and Martin Place. Recent re-development of the traditional Prime Retail Precinct now provides shoppers with the best retail offering in Australia.

Retail is also successful in George Street to the north and south of the Prime Retail Precinct, where retailers take advantage of demand from tourists and commuters; who travel along the city’s spine.

The Rocks and Circular Quay are popular destinations for tourists and retail, catering more to their needs is evident in George Street North.

Services, food and some low to mid level fashion retailers cater for commuters who come from Wynyard and Martin Place stations.

Development in the southern end of the Sydney CBD, World Square (2005) and The Galeries Victoria (built 2000) saw an improved offer of retail south along George Street to cater for local workers and residents.

The Sydney CBD Retail report surveys tenant retail types by shop front and analyses demand for retail accommodation. The current report shows demand is mainly driven by ‘Clothing and Softgoods’ retailers (42 percent), and ‘Cafes, Restaurants and Takeaways’ (21 percent) and ‘Services’ (11 percent).

Demand for ‘Services’ and ‘Other’ retailing is higher in the commercial core of the Sydney CBD, where retailers provide for workers as well as tourists and residents rather than destinational retail. ‘Other’ retailing, which includes retail such as pharmacies, florists and stationers etc, makes up 11 percent of the current retailer profile in the Sydney CBD.

The Prime Retail Precinct has a higher concentration of ‘Clothing and Softgoods’ retailers (49 percent); while services, hospitality and fresh food offerings have a lower representation compared to the rest of the survey. This difference in tenancy mix is due to the high number of larger enclosed centres within this area.

There has been a massive change throughout the wider Sydney CBD and surrounding suburbs over the last three years in terms of tenancy mix. The trend for CBD and non-CBD retail alike has been that of a distinct shift from ‘Retail and Personal Services’ to ‘Food and Drink’ retailing. More specifically, Savills have recorded a dramatic shift from ‘Personal Services’ to ‘Cafes, Restaurants & Takeaway’ food retailing.

The Sydney CBD commands some of the highest retail rents in the world. Having remained static for three years, prime rents in Pitt Street Mall decreased in the second quarter of 2013, in response to dwindling tenant demand. However, since then average rents have held firm at $8,875 per square metre per annum, a 4.6 percent decrease over the last 12 months. The main driver behind this fall in rents is undoubtedly a combination of the tenant’s capability to pay very high face rents, with little or no incentives being offered by the landlord at the time of signing the original lease, and the fact that leases are now coming up for renewal. There is certainly a shift in the balance of power between landlord and tenant and this is being borne out in the Sydney CBD retail market.

More recently the use of large incentives to attract and/or retain tenants is present within the market, while a shop fit-out or a rent free period remains the preferred type of incentive for new tenants, a renewing occupier would likely seek a combination of a rent free period as well as a significant drop in face rent.

Food5%

Department Stores<1%

Clothing, Footwear and Personal Acc.

42%

Household2%

Recreational3%

Other11%

Cafe Restaurants & Takeaway

21%

Hospitality3%

Services11%

Vacant2%

Sydney Retail Sydney CBD Tenancy Mix (% Shopfront)

as at H2 2013




Retail Tenancy Mix by Number – December 2013

Category Prime Retail Precinct Core Rocks King Street

Wharf Southern Total

Food 27 25 3 1 6 62

Department Stores 3 0 0 0 0 3

Clothing and Softgoods 311 183 22 0 25 541

Household 19 8 0 0 3 30

Recreational 16 13 4 0 2 35

Other 52 54 23 0 9 138

Cafe, Restaurant & Takeaway 110 94 10 24 30 268

Hospitality 10 8 10 8 1 37

Services 69 60 2 0 19 150

Vacant 16 12 2 2 2 34

Withdrawn (Under Construction) 1 2 0 0 0 3

Total 634 459 76 35 97 1,301


The introduction of Westfield Sydney development and Mid City Centre heralded an increase in ‘Clothing and Softgoods’, and ‘Cafes, Restaurants and Takeaway’ in the Prime Retail Precinct.

Recent development has also had a ‘musical chair’ effect on tenants throughout the city. Many who were not previously located in Pitt Street Mall have been able to relocate. A number of retailers were also drawn from alternative locations within the Prime Retail Precinct; such as Zimmermann from the Strand Arcade, Prada from Martin Place and Nespresso from King Street Wharf.

A large number of international brands are still considering the Australian market and are seeking flagship prime locations outside the Prime Retail Precinct of Sydney CBD. Some of the international brands arriving in Sydney are River Island (UK), H&M (Sweden), Uniqlo (Japan), Marks & Spencer (UK), Forever 21 (US), Hamleys (UK), Microsoft (US) and Sony (Japan).

Consumer attitudes have changed, with shoppers becoming more comfortable with online purchasing. However, the reality is that whilst real spending for online retail has increased, the share of total spending is still rather modest.

According to the December 2013 NAB Online Retail Sales Index, Australians spent $14.7 billion on online retail over the last 12 months an increase of $1.9 billion from last year figures. The online share of total retail spending remains modest at just 6.5 percent.

In seasonally adjusted terms the Australian Bureau of Statistics (ABS) recorded a 0.5 percent increase in retail turnover in December 2013. This follows a rise of 0.7 percent in November 2013 and a rise of 0.5 percent in October 2013. In trend terms, Australian turnover rose 4.6% in December 2013 compared with December 2012 The following industries rose in trend terms in December 2013: Food retailing (0.6 percent), Cafes, restaurants and takeaway food services (1.2 percent), Other retailing (0.5 percent), Clothing, footwear and personal accessory retailing (0.7 percent), Department stores (0.4 percent) and Household goods retailing (0.1 percent).



Retail Vacancy

Over the last 12 months there has been very little change in the broad composition of the retail and service offering in the Sydney CBD.

Vacancies generally tend to be located in inferior, out-of-the-way, or upper level locations rather than superior street frontage locations. There is currently some ‘hidden’ vacancy where a number of shops are promoting new or lesser known artists, or ‘sales’ shops with makeshift fit-outs, often referred to as ‘pop-up’ stores, are currently occupying a number of locations throughout the Sydney CBD.

These are temporary stores using short-term leases, from a few days up to a few months, to set up in vacant retail space used by retailers to introduce themselves into new markets where they have not yet established a real estate presence.

Retail Vacancy – December 2013

Precinct Shops (No) Vacancy (No) Vacancy (%)

Prime Retail Precinct 634 16 2.5

Core 459 12 2.6

Rocks 76 2 2.6

King Street Wharf 35 2 5.7

Southern 97 2 2.1

Total 1,301 34 2.6


With a higher retail vacancy rate in the last 12 months, there has been significant increase of these pop-up stores occupying prime vacant retail shops.

Vacancies that were created by tenants moving into and out of the Prime Retail Precinct during construction of Westfield Sydney and the Mid City Centre have mostly been occupied. However, in the current survey the Prime Retail Precinct has recorded the highest level of vacancy at 2.5 percent since first survey was taken in 2008.

Sydney CBD Prime Retail overall vacancy has more than doubled in the last 12 months, increasing to 2.6 percent in second half of 2013 from 1 percent in second half of 2012. Despite this, Sydney has the lowest vacancy rate of the monitored CBD retail markets.

Perth CBD has the highest level of vacancy at 12.4 percent, followed by Melbourne CBD (7.2 percent), Adelaide CBD (6.2 percent) and Brisbane CBD (6 percent).

Key Market Indicators

Key Market Indicators – December 2013

Pitt St Mall Other CBD

Low High Low High

Net Rental ($/sq m) 4,500 13,250 500 4,000

Yield - Market (%) 5.50 6.50 5.50 8.00

Outgoings Operating ($/sq m) 184 344 184 344

Outgoings – Statutory ($/sq m) 31 63 31 63

Outgoings - Total ($/sq m) 215 407 215 407

Capital Values ($/sq m) 10,000 35,000 5,000 10,000


Also of significance to the consumer is the level of interest rates. The consumer is particularly vulnerable to changes in interest rates because the general level of household indebtedness in Australia is high. A rise in interest rates directly diverts money from discretionary expenditure to interest repayments, assuming that the consumer has a variable rate mortgage.

In an attempt to stimulate retail spending, the Reserve Bank of Australia (RBA) has been drastically cutting the official cash rate, by 225 basis points from 4.75 percent in November 2010 to 2.50 percent in August 2013. At the latest meeting in February 2014, the RBA decided to once again hold the cash rate steady at 2.50 percent. As a result, retail turnover (seasonally adjusted) according to the ABS has increased by 11.1 percent between November 2010 and December 2013.



Outlook

Australian retailers have been protected from global competition due to the tyranny of distance and out of sync seasons. Brand globalisation and online retailing has generated interest from international retailers as a result of the current demand for their products. Although there appears to be some inertia around the so called wave of international retailers desiring to call Australia home, the ever present challenges of price harmonisation (relative to their online presence), seasonality and the inherent high cost structures within Australia will continue to present challenges for less wary operators.

In seasonally adjusted terms the Australian Bureau of Statistics (ABS) recorded a 0.5 percent increase in retail turnover in December 2013, following rises in November 2013(0.7 percent) and in October 2013(0.5 percent). In 2013 the Reserve Bank of Australia cut the cash rate twice from 3 percent to 2.5 percent. Economists are expecting an extended period of steady rates in the following months which will assist in boosting consumer confidence.

Centres in the Prime Retail Precinct now house some of the best internationally known retailers and luxury brands available. More brands have expressed interest in Sydney and there will be opportunities for the larger centres, and some stand alone premises, that are able to provide impactful locations to snare these brands. The presence of international retailers has also created higher foot traffic benefiting other retailers in those centres.

Retail demand in Sydney is expected to remain strong due to the desire to be amongst the newly redeveloped offering; however, we may see some fallout of retail business due to the current economic climate and its effect on retail sales. Although the Australian economy is faring better than the rest of the advanced global economy, consumers are still hesitant to spend on goods that are not a necessity.

Outside the Prime Retail Precinct, we believe that the services and lower to mid range fashion will continue to perform well and demand remains strong as workers and tourists continue to support these types of businesses. We may see the trend continue of upper end fashion relocating in better positioned stores in the Prime Retail Precinct from areas such as Martin Place and The Rocks.

Retail is poised to remain an important part of the Sydney CBD, with new retail being encouraged in ‘laneways’, the possibility of George Street becoming pedestrianised, and a new Retail Advisory Panel, all assisting retailing business in the CBD.



Category Definitions

Category Retailing Function

Food Supermarket and Grocery Stores

Fresh Meat, Fish and Poultry

Fruit and Vegetables

Liquor

Other Specialised Food Retailing

Bread and Cake

Specialised Food

Department Stores Department Stores

Clothing Softgoods Clothes Retailing

Footwear

Watch and Jewellery

Other Personal Accessories

Household Goods Furniture

Floor Coverings

House Ware

Manchester and Other Textile Goods Retailing

Electrical, Electronic and Gas Appliances

Computers and Peripherals

Other Electrical

Hardware and Building Supplies Retailing

Garden Supplies

Other Retailing Sport and Camping Equipment Retailing

Entertainment Media Retailing

Toy and Game Retailing

Newspaper and Book Retailing

Pharmaceutical, Cosmetic and Toiletry

Stationery

Antique and Used Goods

Flowers

Other-Store Retailing

Retail Commission-Based Buying/Selling

Libraries and Archives

Other Information Services

Video and Other Electronic Rental and Hire

Cafes, Restaurants and Takeaway Cafés and Restaurants

Take Away Food

Hospitality Catering Services

Pubs, Taverns, Bars

Clubs

Services Printing

Postal Services

Finance and Insurance Services

Real Estate Services

Photographic Services

Travel Agency and Tour Management

Health Care Services

Hairdressing and Beauty Services

Laundry and Dry Cleaning Services

Source: ABS ANZSIC Codes 2006 / Savills Research


This information is general information only and is subject to change without notice. No representations or warranties of any nature whatsoever are given, intended or implied. Savills will not be liable for any omissions or errors. Savills will not be liable, including for negligence, for any direct, indirect, special, incidental or consequential losses or damages arising out of our in any way connected with use of any of this information. This information does not form part of or constitute an offer or contract. You should rely on your own enquiries about the accuracy of any information or materials. All images are only for illustrative purposes. This information must not be copied, reproduced or distributed without the prior written consent of Savills. ©Savills 2014


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savillsresearch spotlight sydney cbd retail q4 2013

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