Australia’s big cities have some of the highest retail rents in the world: Report

Australia’s capital cities are some of the most expensive when it comes to retail, according to a new report from research group CB Richard Ellis, which pins Sydney as the second most expensive market in the world and says Melbourne and Brisbane are in the top 10.

While the expensive nature of these markets is nothing new, CBRE regional director of retail services Joshua Loudon says continued pressure from discounting, utility charges and the high Australian dollar means the local market remains under significant pressure.

He also says interest from international retailers, particularly in the fashion space, will keep the Australian retail market competitive and possibly push up rents.

The new report says Sydney is the second most expensive after New York, with rent costing an average of $US1,218 per square metre. The city has moved from last year’s ranking, with the Westfield Pitt Street development pushing it from third to second.

Brisbane comes in ninth, with $US705 and Melbourne in 10th at $US584. Other markets rounding out the top 10 include Hong Kong, London, Tokyo, Paris, Moscow and Zurich.

The report also shows that super prime rents, the highest which can be achieved in each CBD, are also rising, with Sydney rents reaching as high $13,560 per square metre, while Brisbane rents have reached as high as $7,8945 per square metre. Melbourne landlords in premium areas can pocket $6,500 per square metre.

The report claims retail rents increased by 0.2% globally from the second quarter to the third quarter. Loudoun points out that rents are increasing due to the creation of new and refurbished space, which is attracting well-known and reputable retailers such as Gap and Zara.

“This isn’t surprising,” Loudon says. “Australia has been expensive on a global scale for quite some time. And keep in mind, you’re looking here at premium rents, so we’re talking Bourke Street Mall in Melbourne, Pitt Street in Sydney and so on.”

“But that being said, we do have very high occupancy costs across the board and that is being driven by town planning legislation, where you have a structure of shopping centres in Melbourne, then super-regional ones like Chadstone and other in some neighbourhoods. This space is well maintained and there isn’t a lot of fragmented retail space.”

While Loudon points out Asian retail markets have performed relatively well during 2010, this performance changes from region-to-region. He says Australian cities have remained competitive due to an influx of international retailers, especially in the fashion market, but says domestic economic conditions may keep retailers under pressure.

The report points out that 49% of global retailers had a presence in each of the three main global regions, with Sydney counted as one of the top five destinations for North American companies, alongside Dubai, Tokyo, London and Mexico City.

Loudon says this interest will keep rents high.

“Australia is an expensive retail market. We have higher occupancy costs than most other countries, and that goes back to the town planning issue. We don’t have an oversupply of retail markets as they might have in other countries. We don’t have a lot of b-grade shopping centres showing up.”

“But domestic problems are also challenging. Probably one of the issues facing retailers at the moment more than anything is the issue of rising utility charges. Particularly water, which has increased quite a lot.”

The report also points out that despite growing consumer sentiment and employment conditions, rising interest rates and weak residential property activity will keep household spending subdued until well into 2011.

Loudon says this is the natural result of a downturn and the tail-end of an influx in stimulus spending. He says retailers will remain under pressure for some time as rents remain high and spending is low.

“I don’t think it’s a great surprise that retailers are suffering. We’ve seen that sales have been flat, the Australian dollar is high and so on, and so the recession that we should have had in the market 12 months ago is happening now,” Loudoun says.

However, he does offer some relief: rising interest rates and low retail spending should keep rents stabilised over the next 12-18 months in areas outside the Super Prime space.

“This is simply part of the cycle we’re going through. This isn’t a quick fix, it can’t be done just like that. And the cycle is somewhat longer than what people were predicting. But the market will remain competitive and activity will increase over time.”