It's prime time in tough retail sector

Vacancy rates for leased retail properties have increased on the back of a declining economy, but occupancy rates for well-located retail outlets still remain at healthy levels, says Bayleys Research in its latest overview of the Auckland retail property market.

The survey of shops located in prime and secondary locations in four Auckland cities showed an overall vacancy rate of 3.5 per cent, up on the 1.5 per cent rate recorded at the beginning of 2008. Of the four cities, North Shore had the highest level of vacancy, at just under 6 per cent, while Waitakere had close to 5 per cent.

Bayleys Research analyst Sarah Davidson reports vacancy in these cities is most noticeable in areas where the pedestrian count is lower. Manukau's vacancy rate remains low, at 1.71 per cent. Davidson says there is a high level of shopping centre and large-format bulk retail in Manukau City, which typically operates at lower vacancy rates than strip retail. However, vacant units were noted in both formats during the survey.

Auckland City vacancy increased only marginally to 3.3 per cent from 2.7 per cent a year ago. While vacancies were observed on Queen St, these were few and mostly in areas where pedestrian traffic is lower. There was only one vacant unit observed in the sought-after lower Queen St precinct, stretching north from Victoria St towards the waterfront. "On a sector-by-sector basis, bulk retail is still the best-performing in terms of vacancy at close to 1 per cent _ a reflection of the typical nature of bulk retail tenants," says Davidson.

"They are generally national chains, which are well-established and better equipped to survive difficult trading conditions." Likewise, shopping centres recorded a low level of vacancy at under 2 per cent, although this is an increase on last year's sub-0.5 per cent.

Davidson says reports suggest that offshore retailers who have been looking to get into the New Zealand market for some time are making the most of the opportunities now evident in some of Auckland's major retail areas.

"Key money is no longer a requirement to gain premises in lower Queen St, for example, and instead incentives are now being offered in some instances for retailers to take space. This will ensure that well-established, opportunistic retailers will be in a prime position when confidence returns and retail spending increases."

Bayleys Research says despite weakness in the economy, retail investment property maintains its positive outlook, particularly at the prime end of the market. This was reflected in results from Bayleys' Summer 2009 Total Property portfolio, with 12 out of the 15 properties selling at, or before, the auction being retail offerings _ many with national tenants. "Prime retail properties are popular with investors because of their strong tenancy profile and locations, which reduces vacancy risk," says Davidson. "Investors are also taking advantage of a positive yield gap that has resulted from the substantial lowering of interest rates and the increase in yields on property, which means that the income returns from property significantly exceed borrowing costs.

"Retail properties selling for more than $1 million are generally doing so at yields in excess of 8 per cent, although some lower-valued properties are still selling at lower yields because of the greater competition at this end of the market."