Three Aussies in the Top 10

Sydney, Melbourne and Brisbane have all made the global top 10 list of cities with the most expensive prime retail rents, according to new research from CBRE.  However, Hong Kong continues to rank as the world’s most expensive global retail market, recording prime rents nearly 150% higher than New York and more than 400% higher than London, Paris and Sydney.

CBRE’s quarterly survey (Q1 2013), which tracks the top 10 most expensive prime global retail markets, has revealed that strong demand from international retailers, coupled with a modest supply pipeline, has led to record-high prime rental rates. Leading the pack, Hong Kong continues to rank in a rental class distinctly above its global peers, recording prime rates during Q1 2013 at US$4,328 per square foot per annum

While markets such as Hong Kong, New York, London and Paris did not record increases in prime rents this quarter, these cities have exhibited resilience due to international retailers continued longer-term strategic expansion strategies which feature a distinct preference for prime space in the best locations in these markets.

The supply of prime space was tight throughout the Asia Pacific region, which helped maintain rent levels in Sydney, Melbourne, Beijing and Tokyo. In Sydney (US$1,018 per sq. ft), demand from international retailers (especially from the US) is high with many new brands set to enter the market in 2013.

Australian markets were particularly prominent in the global retail rankings with Brisbane (US$739 per sq. ft.) and Melbourne (US$851 per sq. ft) now ranking among the most expensive prime retail markets.

Brisbane the Big Mover

Thanks to strong turnover and a limited supply forecast for Brisbane’s Queen Street Mall, prime rents as measured in local currency jumped 15% quarter-over-quarter. As a result, Brisbane’s prime retail rent ranking rose two positions to ninth place.

Not only has Brisbane’s mining and other natural resources sectors supported the local economy, population growth for the market as a whole is also serving to boost expectations for future retail growth prospects. As such, growth in its retail sector, in terms of turnover and rental growth is expected to continue in line with the current trend.

The Brisbane “super prime” retail market remains tightly held and continues to enjoy extremely low vacancy rates.  New store openings of international brands such as Coach, Sambag, Camper, Lee Jeans, French Connection, Mecca Maxima are helping to keep rental rates high in the major Brisbane CBD retail centres listed below:

New supply of retail space to the market is also expected to be very low over the coming years, ensuring Brisbane super prime space will continue to command premium rates into the foreseeable future.

International Brands Moving In At The Expense Of Locals

Prime rents in Sydney and Melbourne were unchanged in price in the first quarter. Sydney was the fifth-most expensive at US$1,018 per sq. ft and Melbourne seventh at US$851 per sq. ft. CBRE’s report showed demand from international retailers, especially United States’ brands, have propped rents in Sydney, Melbourne and Brisbane. New brands entering the Australian market this year include Japanese clothing brand Uniqlo, Swedish label H&M and US home wares giant Williams-Sonoma. Spanish fashion retailer Zara, Canada’s Lululemon Athletica, and Topshop and Topman from Britain continue to expand their Australian store numbers.

Australian retailers have blamed high rents for forcing local outlets out of prime locations. CBRE said off-prime stock and space in secondary locations were gaining favour among tenants reluctant to pay record-high rents for prime space. Mark McInnes, chief executive of Premier Investments, has threatened “store closures … if the rents expected by the landlords are not in-line with the performance of the centre and the market generally”. Myer makes a similar case. According to Fairfax Media, Myer “will close as many as a quarter of its outlets as leases expire if rental costs, estimated at 52 per cent higher than those paid on average by New York-based Saks, aren’t cut”.

Hong Kong in A Class of Its Own

If Australian retailers think they have cause for concern over the rent they are paying they should feel some sympathy for their counterparts in Hong Kong. Hong Kong continues to rank in a rental class distinctly above its global peers, recording prime rates during Q1 2013 at US$4,328 per square foot per annum. This equates to a prime rate 400% than Sydney, Paris and London.

The combination of a booming Chinese economy and Western retailers competing for a share of the Asian luxury market has pushed prime rents in Hong Kong to record highs.

Are Australian Retailers Really Paying Too Much?

When Gerry Harvey and Mark McInnes cry poor over paying too much rent, they tend to not get much sympathy from the Australian public.  One objective way to assess their claims however is to compare retail occupancy cost ratio’s (OCR) of Australian retailers to their international peers.

OCR represents the relationship between a retailers’ rent and their gross turnover. Occupancy costs are comprised of payments to landlords such as base rent, turnover rent, outgoings, marketing expenses and fit-out costs. These are then compared to tenant sales, and provide a measure of the significance of property costs in the overall cost structure of the tenant. OCR’s help determine if tenants are paying rents that are above, at, or below sustainable levels.

The table below confirms that Australian retailers do in fact pay more of their turnover in rent than their counterparts in the USA, UK and Europe.

So with rental rates amongst the highest in the world, and rents taking up a much greater share of turnover than in international markets, a revolt by Australian retailers may become more than just words.

Global Rental Growth Rates

Although Australian retailers may be justified in complaining about high rental rates, they may feel sympathy for their companions in Mumbai which recorded rental increases of 75% pa.

A study by Cushman & Wakefield revealed that emerging markets, particularly Brazil and India, are fast closing the gap in rental rates as their domestic retail markets mature in response to booming local economies and emergence of massive middle classes.  Surprisingly, two US markets in the stagnating US economy also featured with very high growth rates, but this appears to be more catch up after many years of below trend growth.  The markets to watch for rapid retail rental growth rates continue to be the BRIC economies as large populations of mass consumers emerge.

Conclusion

Prime retail rents across the most expensive global markets have held firm against a backdrop of scarce supply and preference for prime space.

Despite subdued retail sales growth and strained consumer sentiments, international retailers remain focused on long-term growth strategies that have resulted in store expansions across many key global markets such as New York, London and Moscow. However, at the current high levels, retailers are considering “off” prime or secondary locations and showing a reluctance to pay record high rates

Very high occupancy costs, combined with some of the highest labour costs in the world, mean the Australian super prime markets are in a precarious situation. Although rates have continued to remain high due to limited new supply entering the market, it is difficult not to expect some moderating of these rates.  Without such a moderation, there is a genuine risk that retail will simply not be viable in Australia.

Strong population and supply/demand fundamentals underlying demand in emerging markets are however expected to see retail rentals in the BRIC economies outperform into the foreseeable future.