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Colliers International has just released their latest New Zealand Retail Market Indicators report.

There are plenty of data available for those wishing to be optimistic about the outlook for retail property. Spending was up in April and May, immigration is becoming stronger, and vacancy in both retail and office markets is well below levels that were seen in previous recessions. But those of the ‘half empty’ rather than the ‘half full’ persuasion can point to the biggest ever drop in quarterly retail spending in the March quarter this year, low levels of housing starts looking bad for retailers associated with the household sectors, and total retail vacancies in Auckland and Wellington approximately doubling in six months. They might also point out that some retailers, stuck with a long lease at an inflexible rent, choose to stay open, as they lose less that way than if they close.

A mixed bag of indicators is a sign that we are at or near the bottom of the cycle, but that doesn’t mean rents and values will increase from now. The consequences of retailers’ current difficulties will flow through in the form of static rents and increased vacancy, across all grades, but principally in secondary locations.

Auckland’s retail market has experienced a dramatic slow down over the last 18 months. The “Shopping for Shops” bubble has burst since our last detailed retail indicators report in June 2008. A flourish of investment capital has been targeted on Auckland’s retail market since 2001, particularly from large Australian investment institutions. However, the tide has turned for investors in 2009.

The global credit crisis has made it difficult for the major listed and wholesale funds to balance the books. These institutions are finding out the hard way that property’s reputation as an illiquid asset class is well deserved. Seller and buyer’s expectations have drifted apart, as large overseas players seek to withdrawn from the New Zealand retail market are finding that, high net worth private investors don’t always have the same view on value.

Leasing enquires remain firm for prime retail locations. Prime retail rents are stabilising in 2009, while secondary retail owners are feeling the pressure as market rentals weaken. The retail investment market experienced strong growth between 2002 and 2007 as the sector provided more attractive returns to investors than the industrial and office sectors. However, since then, rental growth forecasts have been much reduced. Investment yields have softened by 100 to 150 basis points since the peak of the market reflecting weaker demand and less bullish growth forecasts.

In the Wellington CBD, front 15m rental rates for retail premises in prime Lambton Quay locations typically range between $2000/m² to $2800/m², whereas key secondary locations such as Featherston and Willis Streets generally achieve $800/m² and $1500/m². Yields have remained stable across the prime retail market, ranging between 6.5% and 8.5% for a shop in a prime location. Secondary values are falling reflecting weakening rental values and capitalisation rates.

The retail sector in Wellington will face rising vacancies and static or declining rental growth until economic conditions improve. The current situation is putting upward pressure on investment yields. We forecast yields will soften by 25 to 50 basis points on average over the next six months as investors take a more cautious approach to pricing in order to compensate for less optimistic rental growth prospects.

Better than expected retail sales activity has supported confidence in Christchurch’s retail development market. Retail centre expansions and new development completions have boosted the supply level in Christchurch. The investment market remains active with strong investor demand for good product. However, prime yields have eased by 50 basis points to between 7.5% and 8.5% since June 2008, while secondary yields softened by up to 150 basis points, now between 8.5% and 10%.

The full impact of falling international tourist numbers and the rising national unemployment rate are yet to be felt and it is likely to lead to a flattening of Canterbury’s impressive resilience to date in terms of retail spending growth. Tenant demand and rental growth will remain subdued.

Nationally, retail property is a mixed bag. Activity is holding up in some centres while others have experienced downward pressure. Retail rents remain stable for top locations but have dropped by various degrees for properties of poor quality and in secondary locations across the country.

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