We all know about the development pipelines across the country but what’s fuelling them? In this article written especially for SCN, Alistair Palmer of CBRE gives an overview of new retailers, new concepts and new precincts that are coming on stream.
Strong demand from foreign retailers is fuelling $8 billion worth of retail redevelopments around the country – with little sign of any slowing in activity.
It is a far cry from the post-GFC period, when owners and developers delayed a host of redevelopment projects for the best part of a decade. The dusting off of those plans aligns with the expansion strategies of a raft of new market entrants across a wide range of retail categories.
It also dovetails with a national retail environment that has been considerably healthier than what was experienced in 2011–2012, when sales growth was more in line with inflation.
Much of the redevelopment activity proposed or underway is being undertaken by the listed REITs with a focus on major regional centres, such as Westfield Chatswood, Westfield Warringah Mall and Chatswood Chase, all in New South Wales, alongside Eastlands and Westfield Knox in Victoria.
These owners are capitalising on the current demand from foreign retailers to lift the image profile of their centres, with a view to driving rent increases in the medium term.
In my view the big game changers are likely to be Pacific Fair on the Gold Coast, Chadstone in Victoria and Castle Towers in New South Wales.
Pacific Fair is seeking to increase its floor area from 100,000m2 to 150,000m2, in order to accommodate new fast fashion market entrants and a high-end luxury precinct. The extension works are expected to be completed in Q2 2016, with AMP seeking to take the turnover of the centre from around $600 million to $1 billion per annum.
Another centre to watch is Chadstone. Already one of Australia’s leading shopping centres, the intention is to increase the size of the centre from 175,000m2 to over 200,000m2. This will accommodate tenant demand in the fast fashion sector, extend Chadstone’s already strong luxury precinct and establish a dedicated casual dining area. Turnover from this extension is expected to increase from $1.4 billion to over $1.8 billion per annum. Sydney will also benefit from redevelopment projects, with Castle Towers shopping centre in Castle Hill set to undergo a circa $1-billion project to add a further 80,000m2 – which will make it Australia’s second-largest shopping centre upon completion.
One of the drivers for landlords is the higher returns that can be achieved through redevelopment works – which are generally in the order of about 9% – as opposed to new acquisitions, where returns are more likely to be in the order of 5%.
We’re also seeing some owners removing underperforming department and discount stores in order to replace them with other retailers, including offshore brands, in an effort to strengthen the appeal of a centre and its relevance to consumers.
By repositioning a centre to appeal to changing buyer demographics, owners can often achieve a higher return out of new retailers, who take less space than department and discount stores and have far higher turnover rates per square metre.
Landlords are also downsizing department stores in new projects. For instance, while department stores in regional centres were typically around 30,000m2, the David Jones stores in Macquarie Centre and Pacific Fair are less than half that size at about 14,000m2.
Westfield is adopting a similar strategy at Warringah Mall in Sydney, where the Myer store is to be downsized from over 25,000m2 to around 14,000m2. Fast fashion retailers will take up the majority of the space left over. Another shift for owners has been the need to provide for international entrants – such as the fast fashion retailers – who typically require larger floorplates than Australia’s specialty retailers.
Landlords have had to re-think their ability to provide this space which, in turn, has created a ‘space race’ amongst landlords.
This chart shows rents have lagged behind retail sales since the end of 2013, but are now beginning to rise.
In general, retail footprints are growing across the board, from fast fashion through to the luxury sector. This can be attributed to strong sales results and the desire for retailers to showcase a wider product range.
At present, we’re seeing tenant demand across a broad range of categories due to a number of market drivers. The luxury market is being fuelled by local Asian consumers and tourists, which has, in turn, fuelled the redevelopment and remixing of centres such as Emporium in Melbourne, Chadstone, Pacific Fair, St Collins Lane in Melbourne and Westfield Sydney.
The tier-1 luxury retailers, such as Tiffany & Co, Louis Vuitton, Hermès, Prada and Gucci all continue to expand and are seeking high-quality locations to improve the overall presence of their brands.
We’re also expecting a range of new-market entrants, of the ilk of Saint Laurent, Loewe and Moncler.
Affordable luxury is the next frontier, with this market segment having exploded in Australia with the entrance of Coach, Michael Korrs and Kate Spade. Another likely entrant is Tory Burch, a brand that is yet to confirm they are coming to Australia but is currently under licence.
High-quality designer fashion is another target for landlords, who are expecting a wave of new stores, some of which have some similarities to our Australian designer set of Sass & Bide, Scanlon & Theodore and Zimmermann.
These brands generally have a presence in the likes of the designer floors in David Jones and other big department stores across the globe, but are now branching out to open stand-alone stores.
Sandro, Maje, The Kooples, REISS, IRO and Kit and Ace have all confirmed plans for Australian stores, mainly focused on CBD locations, prime high-end strips and the very best shopping centres, such as Chadstone, Pacific Fair and Westfield Sydney.
Other likely entrants in time will be Rag & Bone, Theory, Zadig and Voltaire. Fast fashion retailers also remain high on the target lists of major landlords, having been in the spotlight since the success of Zara, whose Sydney and Melbourne stores were among the group’s best global traders in their first year of operation and continue to be in the top 10 list.
H&M is the latest Australian success story, with their 5,000m2 Melbourne GPO flagship having been the group’s No. 1 trading store for the past 12 months. The retailer’s Sydney flagship is due to open in October 2015 and will be bigger again at 5,500m2.
When I recently quizzed H&M about their success in Australia and why they were trading so well, the feedback they gave me was that Australians haven’t had great shopping options to date and that this has been a fairly closed market. We have lacked these larger brands that are able to supply high-quality clothing at the lowest possible prices.
H&M has seen a clear gap to fill and has already opened four stores, with potentially over 100 stores on the drawing board in the long term.
Experience stores are another growth category, as highlighted by Lego’s recent commitment to Chadstone. The Melbourne mall will be the home of Australia’s first major Lego attraction.
The 2,000m2 Legoland Discovery Centre will open in mid-2017 and will include interactive rides, play areas and a small cinema. It’s a true destination retail offering that is designed to bring a fresh new element to the shopping experience.
Food and beverage remains another key focus for landlords, who have recognised the need to have a very strong casual dining restaurant offer to create more dwell time. Westfield Sydney is arguably still one of the best centres in Australia in this regard.
Entertainment is also high on the agenda, with cinemas and bowling alleys playing a key role in redevelopment projects.
Providore markets are another category in the spotlight to provide a high quality fresh food offering.
All of this activity, the prevalence of foreign brands and relatively strong growth in retail sales over the past 18 months translated into higher rents in Q2 2015.
We expect further rent growth in H2 2015, although it’s worth bearing in mind that retailers are resisting large rental increases amid profit margin pressures because of the lower AUD driving up cost of goods sold; which could take 12–18 months to wash through.
SCN
