Where is the Sydney retail market going?

Consumer demand and retail real estate go hand-in-hand. So what are consumers looking for in Sydney? And how is this reflected in the retail market?

While the Australian economy continues to grow at a slower pace than investors might like, low interest rates, the low Australian dollar and other factors are counter-balancing the somewhat sluggish economy, making some sectors of the retail market buoyant.

Retail trends nationwide

Nationally, large-format real estate is outperforming other sectors of the retail market in major centres, followed by neighbourhood retail centres, which are performing above the cyclical low. Several factors are responsible for this:

• Housing prices continue to rise, contributing to increased sales in household goods.
• Interest rates and fuel prices are low. These give consumers more money for discretionary spending. Sales of clothing, footwear and personal accessories were up in the first quarter of 2015, followed by food retailing.
• Low interest rates contribute to consumers reducing their savings and spending their money on goods and services.

While unemployment has been relatively high in some sectors, white-collar employment has increased nationally and is expected to grow further. This helps account for a shift away from discount department stores and towards speciality retail outlets and luxury goods.

Another emerging trend in urban areas is a greater demand for integrated living accommodation. Investors in retail real estate are taking advantage of this by creating retail “villages” including hotels, apartments and/or student housing in their retail development plans.

The low Australian dollar is expected to have a dampening effect on consumer spending on some imported goods as the flow-through to retail prices hits. However, this is partially offset by reduced online purchases which reached a peak of six per cent of retail sales when the dollar was strong.

Retail trends in Sydney

Local trends coincide with national trends in the Sydney retail market to a degree. The difference may be the degree of luxury spending in Sydney compared with other major cities. Sydney residential prices are up a record 14.5 per cent. This helps fuel the growth in spending, but doesn’t entirely account for the concentration of retail development in the Sydney CBD, where supply exceeds demand. According to data compiled by JLL Asia Pacific, several factors are responsible for this:

• CBD employment has increased from a low of less than half a per cent in 2013, to approximately 1.5 per cent in 2015 and is expected to grow further through 2016 and 2017.
• The pedestrianisation of George Street is attracting more upmarket retail outlets.
• Wynyard Walk, between Wynyard Station and Barangaroo, will help revitalise the CBD.
• A light-rail system extending from Circular Quay to Randwick will help support higher density living in the CBD.
• Tourism is on the rise, with a surge in numbers from -0.5 per cent in 2012 to 7.2 per cent in 2014.

The light-rail system and pedestrianisation of George Street are expected to be completed by 2020. In the meantime, retailers are competing for space in the CDB to take advantage of current and future opportunities. Some major projects recently completed or underway include:

• The $1.2 billion redevelopment of Westfield Sydney.
• Completion of the MidCity Centre in 2010.
• The retail components of Barangaroo.
• Brookfield’s One Carrington Street project at Wynyard which will include office and retail space.

A number of international retailers have established a presence in the CBD. Notable examples include Zara, Gap and luxury fashion retailers Miu Miu, Mulberry and Bottega Veneta. While the retail market is not entirely centralised in Sydney, the CBD remains one of the most attractive destinations for the luxury market. This is reflected in the price of CBD real estate. According to an article in the Australian Financial Review, Pitt Street Mall is now the fifth most expensive retail property in the world.

The three Sydney retail sectors that show the most promise are luxury goods, household goods and some types of food retailing. While foreign investment in retail real estate has been relatively weak in comparison to other sectors of the market, a change is anticipated. According to the Australian Financial Review, Sydney and New York are expected to be the only two major cities to experience growth in the luxury housing market. As this growth continues, further foreign investment in the luxury retail market is anticipated. Most pundits agree that retail sales will continue to grow as long as interest rates and fuel prices remain low and the housing market remains strong.