Foreign Investors Driving Sydney's Retail Growth

Sydney's retail market is set to considerably outperform the city's office sector over the next three years, with a strong inflow of foreign retailers underpinning a spike in rental growth.

A new CBRE research report analysing and comparing office and retail capital values has found strong demand from offshore retailers looking to gain a foothold in the Sydney CBD will drive strong rental growth of 4.7% per annum over the next three years. In comparison, the office market is forecasted to grow by just 1.0% per annum.

The divergence in capital value growth is expected to be even greater with an 18% hike in prime retail values forecast in the decade to 2017 as opposed to flattish growth for core prime office property.

CBRE Research Analyst Alexander Salman said Australia's strong population growth, high income, and high consumption per capita, was supporting increased demand for CBD retail spaces from foreign retailers.

In 2014, approximately 12 foreign retailers opened stores or secured space totalling over 12,000sqm in the Sydney CBD.

With only 37 of the top 250 retailers globally estimated to have a presence in Australia, CBRE forecasts the arrival of more foreign retailers in the long term, with offshore tenants already expected to have a requirement for an additional 30,000sqm of Sydney CBD retail space.

"The demand for prime and super prime retail stock from foreign retailers currently presents a significant challenge in sourcing suitable sites, given the low vacancy rate (2.0%) and large space requirements in contrast to Sydney's predominance of small format stores across the CBD," Mr Salman said.

Sydney's CBD landscape has traditionally favoured office space, with early examples of commercial developments such as Australia Square giving little or no favour to retail on lower levels.

The report shows the undersupply in the retail market - and continued demand from foreign retailers - is expected to be met with increased development of retail space in the medium term, with a key catalyst being the divergence in capital values between office and retail use, offering tempting upside for many landlords.

Given the outperformance of retail, which CBRE predicts to continue into the medium term, CBRE Head of Retail Brokerage Leasing Australia, Leif Olson said three opportunistic trends were expected to emerge in Sydney.

"These trends include the potential for a major new retail based development, a greater portion of retail space in new mixed-use developments and "unlocking space" through refurbishments and expansion of existing assets," Mr Olson said.

Additional retail space in mixed use developments is another emerging trend, with a new norm being for projects to accommodate a 10-15% retail component as opposed to an historical average of 0-5%.

Unlocking a space is a third trend identified in the CBRE report, including office to retail conversions as well as the conversion of basements, rooftops, filing in voids and lane-way activation.