Residential market recovery to kick start retail sector

Improved consumer sentiment and a healthier economic outlook is set to kick start a recovery for Australia's retail spending, according to research from CBRE.

The CBRE Q4 Australia Retail MarketView highlights that the pace of retail sales improved significantly in the final quarter of the year, with retail turnover lifting 4.7% in the year to November 2013.

The large format asset class of the retail market has re-emerged as a dominant growth sector, with improved household wealth and consumer confidence underpinning an increase in dwelling starts.

CBRE Senior Research Manager Claire Cupitt said the large format sector was closely aligned with residential market activity.

“Dwelling starts rose 24% in the year to November 2013, underpinning consumer demand for household goods associated with new homes and alternations/additions,” Ms Cupitt said.

“This improved environment for large format retailers is expected to support rental growth in the market over 2014, which will be largely welcomed following a long period of lacklustre growth.”

By comparison, regional shopping centres recorded 0.1% growth in 2013, with this projected to rise by an improved 1.4% in 2014 and 2.5% in 2015.

Prime CBD retail experienced 0.6% growth during the same period, with 0.6% and 1.6% forecast for 2014 and 2015 respectively.

CBRE Head of Large Format Retail Australia Chris Parry said the large format sector in Australia was evolving, offering more secure and diversified retail mixes which would continue to drive demand, rental growth and ultimately yield compression in the sector.

“With the housing sector gaining momentum, large format retail assets will continue to perform strongly, particularly in New South Wales and Victoria where concentrated levels of growth remain,” Mr Parry said.

“Whilst new supply has slowed nationally in recent times, we are beginning to see a lift in construction. Developers and lenders are beginning to see the market as an opportunity, and previously mooted developments, are now either under construction or about to commence.”

Recent examples of new large format retail supply include the Joondalup Square development in Western Australia, which is anchored by Bunnings and Super Amart Furniture; and the Millers Road large format retail centre, anchored by Bunnings, JB Hi-Fi and Officeworks. The Millers Road centre will also be home to the first supermarket in a Victorian large format retail centre.

In 2013, there was a significant increase in overall retail investment activity, lifting 70% from 2012 levels – accounting for $7.7 billion worth of assets changing hands during the 12 month period.

CBRE Regional Director of Retail Investments Neil Proudlove attributed strong investor appetite levels to the ongoing strong fundamentals offered by the Australian retail market.

“Investors continue to target Australian retail assets, particularly centres which are supported by strong tenant profiles, stable incomes and development, income or capital growth potential,” Mr Proudlove said.

“Strong investor interest has returned to the large format retail asset class, supported by the upswing in the dwelling construction cycle. In hindsight, this asset class has been ‘over-sold’ during recent years.”

He added: “Centres with strong retail covenants are providing astute investors with excellent property returns.”

The report shows the emergence of foreign retailers within prime strip locations has created fresh retail and choice offerings for consumers, which has helped attract shoppers back to CBD locations.

A new wave of international competition is expected to enter Australia’s CBDs in 2014, including Uniqlo (above), H&M, Hollister, River Island and Forever 21. Following the opening of its first Australian store in Victoria last December, Japanese retailer Muji is preparing to open two further stores this year.