,Australia

Sydney CBD retail rents see biggest drop of 11% in Q2

Rents in regional and sub-regional areas fell 5.4% and 2%, respectively.

A recent JLL report reveals that in Sydney, CBD rents have fallen the most (-11.0% y-o-y), followed by the regional (-5.4% y-o-y) and sub-regional (-2.0% y-o-y).

"Meanwhile, neighbourhood (-0.2% y-o-y) and large format retail (+0.4% y-o-y) rents have remained relatively stable. Investors are showing strong preference for neighbourhood and large format retail assets due to their outperformance in the last 18 months which has supported rents," adds JLL.

Here's more from JLL:

Yield movements varied across sub-sectors over the quarter. CBD and regional yields remained stable. The Sydney sub-regional median yield tightened by 6 basis points (bps) to 5.92% in 2Q21 and has compressed by 31 bps on an annual basis. Neighbourhood and large format retail midpoint yields both compressed by 13 bps over the quarter, and 38 bps annually.

Demand for non-discretionary retail assets met by strong supply

Two projects were completed in 2Q21, adding 18,200 sqm of retail space in Sydney. The completion of the first stage extension of Marrickville Metro in 2Q21 added 40 new retailers and a line of restaurants. Brookfield Place, a mixed-use development in the CBD, also completed in 2Q21, has added high profile retailers and a fresh food precinct.

The short-term supply pipeline has been disrupted by the ongoing pandemic, with four projects set to commence in 2Q21 pushed out to a later start date. Nonetheless, the medium-term supply pipeline looks strong. The five projects forecast to be completed in 3Q21 reflects the substantial investor demand for neighbourhood and large format retail assets.

Outlook: Recent lockdown may interrupt the improving retail outlook

The ongoing COVID-19 pandemic and slow vaccine roll-out remains a challenge. The current lockdown in NSW following the surge in COVID-19 cases is likely to disrupt the momentum of strong growth in consumer sentiment, posing headwinds for the retail sector. However, there are optimistic signals such as the strong medium-term supply pipeline and improving transaction volumes.

Smaller, more convenience-based sub-regionals, neighbourhoods and large format retail assets are expected to continue to be sought after. Pricing for larger, more discretionary weighted assets will be tested with the upcoming sales of part shares in regional assets.

Note: Sydney Retail refers to Sydney's overall retail market.

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