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AUCKLAND RETAIL REPORT 1ST HALF 2008

MARKET COMMENTARY

The changing economy is having a flow on effect on retail property. The key elements that make investment property successful are being emphasised in these tough market conditions, while new approaches reflect a need to secure value growth.

Over the last 20 months the Auckland Region has had 450 retail units added to its inventory with the opening of the Westfield Albany, the completion of Sylvia Park and the refurbishment of Westfield Manukau, displaying companies’ eagerness to invest in retail development.

Quality Control

As with other forms of commercial property, there is a flight to quality amongst retailers, which has been primarily driven by shoppers’ desire to spend their time in quality controlled environments. They will choose to drive out of their immediate catchment area if they believe the alternative will offer a better experience. This trend is exemplified in the success of shopping centres, bulk retail centres and prime strip retail throughout the country.

Location

Establishing retail in the right location has always been a key to successful retail investment and this has been emphasised in the current slowing retail market. Retailers are required to be more astute in knowing their customers and set themselves in a location that suits.

Vacancy

Perceptive retailers are conscious that successful businesses are located in areas which receive high levels of pedestrian traffic. Because of this prime strip retail areas typically have very low vacancy rates. It is peripheral, secondary locations that suffer most from economic downturns

Tenant Quality

It has become increasingly important, from an investor’s point of view, to have secure tenants in their retail property. Where over recent years landlords have been happy to accept an offer from the highest bidder, the focus has changed with landlords wanting longer guarantees from a tenant they see as a long-term occupier of their space.

Rent Reviews

Another emerging trend is the use of annual CPI rent reviews for the entire term of the lease as opposed to the previously common mix of CPI and ‘to market’ reviews. Landlords have been willing to restrict open market assessments of lease renewals. They are willing to leave rent adjustments to lease renewals on the basis that CPI renewals are easier to administer, manage and are more cost effective.

Consumer Confidence

While consumer confidence hit a ten year low, according to the Westpac McDermott Miller quarterly survey released in March, people have become consumers by nature and will continue to spend money. Perhaps the amount spent will drop, but generally people still need to purchase the basics. It will be other luxury items that will be removed from the budget as discretionary spending dries up to meet the increasing costs associated with housing, travel and basic food items.

An independent retail consultant believes well priced, affordable fashion retailers will always do well in New Zealand despite the economic environment, as will luxury end retailers – their target market being the more affluent consumer. It is the middle of the road retailers that will be hardest hit by the economic downturn.