CBRE research has determined improving sales turnover per sqm, coupled with lower bond yields, should lift CBD rental growth expectations and support further yield compression across Australia in 2015.

In Q1 super prime net face rents grew by 1.5% nationally, whilst prime and secondary rents both recorded 2% growth. This brings the annual growth rates to 11%, 8% and 6% respectively.

CBRE’s Head of Research Stephen McNabb said super prime rents continued to outperform, given this was the most desired space for foreign retailers – more than 40 of whom entered the Australian market last year. This year a similar volume of entrants is expected, but with stronger interest from premium international brands.

“With the majority of fast-fashion retailers now having secured CBD space, the next wave of foreign retailers, including the affordable luxury and luxury retailers, will arrive throughout 2015,” Mr McNabb said.

CBRE’s Head of Retail Representation Australia Tim Starling said, “Sydney is being seen as a global gateway city and as the flagship destination of choice for retailers entering the Australian market.

“This year, H&M and Forever 21 will open Sydney flagships on the heels of the 2014 openings of Sephora’s first and Uniqlo’s second Australian stores. Moving forward, the influx of premium international and luxury retailers is expected to shift more demand to prime locations, particularly for smaller speciality size spaces, given they do not target the mass-market like fast fashion retailers,” Mr Starling said.

Prime rents are forecast to experience strong growth in the coming years, with 6.5% growth in 2015, followed by 3.5% growth in 2016 predicted.

Foreign retailers continue to have substantially higher margins than domestic retailers, and place significantly higher emphasis on branding and advertising, which helps achieve high foot traffic and online sales.

“This will continue to drive the ‘bulge effect’, where domestic retailers are pushed to secondary locations and spaces they typically wouldn’t occupy as a result of additional competition and rising rents,” Mr Starling said.

Super prime and prime yields have compressed by roughly 20 bps and secondary 15 bps respectively in the year to March 2015.

Mr McNabb said, “This tightening trend is expected to continue over 2015 as the rent growth outlook and investor demand remains strong.

“If vacancy rates remain low across most retail asset classes, and demand holds up this year, we expect this will support rental growth and trigger an increase of retail supply, especially in CBD centres,” he said.

The space constraint, particularly in Sydney, is further spurring retail development with the new supply largely expansions of existing centres.

“We believe the tight vacancy rate and rising CBD rents could be the catalyst for unlocking retail supply in CBD premises over the next five years, with DEXUS already flagging the idea of converting some of its ground floor CBD office space into retail.

“Cities that have received less interest from foreign retailers including Adelaide and Canberra will experience more demand in the medium term, once expansion plans in other cities approach completion,” Mr McNabb siad.

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