Prime, high-traffic retail space is more popular than ever, says Colin Taylor
KEY POINTS:
The Auckland retail property market continues to be dominated by strong leasing and investment in prime retail locations, a Bayleys Research survey says.
"Rental rates for prime locations have been continuing to show good growth, while secondary rental rates have been sluggish," says Michael Grainger, retail manager for Bayleys Real Estate.
"In periods of economic uncertainty, it is often the secondary locations which are hardest hit."
The survey found that retail rentals across Auckland overall have been increasing steadily with the exception of Papakura, which has shown little growth during the past 12 months.
Prime retail rates are now reported to be as high as $3000 per square metre. One lease secured more than $4000 per sq m for a small CBD retail outlet on the corner of Queen St and Vulcan Lane. However, Grainger says this is exceptional and only obtainable for small tenancies in high pedestrian count areas.
Areas in Newmarket are reaching rentals of $1600 per sq m. On the North Shore, the highest rents have generally been recorded in Takapuna, at up to $700 per sq m.
"In the economic environment, with high interest rates and rising fuel and food prices affecting the level of consumer spending, it will become increasingly important for retailers to be well positioned, but with rental rates that are compatible with their business model and which are sustainable," says Grainger.
He says retail property has proven to be a popular investment vehicle, providing excellent total returns.
"Retail property is a useful way for investors to move into the commercial sector, as the initial investment required can often be less than $1 million, thus making it a logical step from residential property investment to retail."
The Property Council of New Zealand investment performance index shows the average yield on a retail property was 7.39 per cent for the year ending March 2008.
Together with a capital gain of 11.89 per cent, this provided investors with a total annualised average return of 19.65 per cent.
Tenant and shopper preference for top quality retail premises is reflected in the council's figures, with shopping centres showing the highest average return over the 12 months. Their total annual return was 20.82 per cent, made up of a yield of 7.01 per cent and capital gain of 12.98 per cent.
Bulk retail property produced a total annual return of 19.2 per cent, comprising a yield of 7.84 per cent _ the highest for all retail property _ and a capital return of 10.6 per cent.
Other retail, which includes supermarkets and strip retail, gave a total return on investment of 16.1 per cent, producing a 7.45 per cent yield and a capital return of 8.1 per cent.
Retail vacancy in the Auckland regional areas surveyed by Bayleys Research has remained almost unchanged, at around 1.5 per cent, during the past 12 months. The survey analyses vacancy rates of retail shops located in prime and secondary locations in Auckland's four major cities.
Three of the four main centres throughout Auckland have experienced a small increase in vacancy but most vacant units are in secondary areas.
Auckland City has a mix of high-end retail, attracting luxury retailers and boutique fashion stores, as well as secondary units with high tenancy turnover. A flight to quality by retailers is typified by Bayleys Research recording a negligible vacancy rate of 0.75 per cent in the lower Queen Street area and CBD precinct, and over 8 per cent in the secondary Upper Queen St area.
"There are reports of key money being paid by retailers to gain entry into prime locations such as lower Queen St, with agents indicating long waiting lists of tenants trying to get into the area and a number of major international luxury retailers jockeying for position," says Bayleys Research analyst Sarah Davidson.
This is epitomised by the recent opening of new Gucci and Louis Vuitton stores, both in the refurbished Imperial Building at the lower end of Queen St. Gucci's 300sq m store will be its flagship in New Zealand while Louis Vuitton has moved from its previous outlet at 99 Queen St.
Another lower Queen St redevelopment in the planning stage is the BNZ Tower at 125 Queen St. It will also be pitched at high-end, luxury retailers and is expected to be completed in 2009.
"Along with other projects undertaken along Queen Street, these developments show that, despite the tougher economic conditions, upgrading well-located premises in order to attract and retain strong tenants is a worthwhile venture," says Davidson.
Vacancy rates in Manukau City remain low, due to the significant presence of shopping centres in the area. Two Westfield centres, one in Manukau City and one in Pakuranga, as well as Botany Town Centre, were surveyed by Bayleys Research and only one vacant unit was recorded.
"Waitakere City also exemplifies a desire by retailers to be located in prime locations that see plenty of foot traffic," says Davidson. "Westfield WestCity had a vacancy rate of zero at the time of the Bayleys Research survey and this not only reflects the strong performance of shopping centres in general, but also the tight market that Westfield has created."
The latest retail vacancy survey undertaken in North Shore City by Bayleys Research shows there is still confidence in the retail sector, with a vacancy rate of just 3.1 per cent. Again, the majority of the vacant units surveyed were in strip retail.
An extensive refurbishment of Milford Mall is under way and planned for completion in late 2008. Its aim is to increase the standard of the mall to a level comparable to surrounding shopping centres, with a greater emphasis on high-end fashion.
