Retail in Auckland – diverging and transforming
With challenges, come value and opportunity for the Auckland retail market.
Auckland’s experience over the last 12 months offers the APAC region a glimpse into the future of retail in a domestically open market with unrestricted population movement. The City of Sails has most certainly proved that retail is alive and kicking. But, interestingly, experience on the ground has varied significantly from location to location and retailer to retailer. There is no longer one identifiable retail property market; post lockdown experience has highlighted and exposed the complex market subtleties in the retail sector once and for all.
Economically, New Zealand’s COVID-19 success has been driven by the government’s decision to isolate the country. The borders have been physically closed to most non-New Zealanders since March 2020. Those with the right to enter (outside of the travel bubble periods with Australia and the Cook Islands) have been required to quarantine in MIQ facilities. GDP figures for 1Q21 show a quarterly uplift of 1.6% – significantly ahead of commentator’s expectations. Growth for 2021 is now forecast to be strong compared to other nations.
Unsurprisingly, the retail sector is facing higher volatility and challenges compared to Office and Industrial asset classes. Retail was already facing structural challenges, including the rise of e-commerce and evolving customer experiential expectations, but COVID added an extra layer of disruption caused by travel and social distinction restrictions.
Despite these challenges, retail spending has held up well. Up to March 2021, total retail sales in New Zealand increased 1.9% from the previous year. At the industry and sector level, electrical and electronic goods saw the highest annual rise (+18.8%), followed by non-store and commission-based retailing (+17.9%), hardware, and building and garden supplies (+8.9%). In contrast, accommodation saw the largest annual decline (-20.3%), reflecting the lack of international visitors, while food and beverage services (-9.3%) illustrated the impact of closures and social distancing restrictions.Similarly, retail asset performance has significantly varied across locations. While neighbourhood/non-discretionary-based centres occupancy continues to be supported and well occupied, strip retail vacancies in the CBD and suburban areas have grown due to reduced foot traffic. Bulk retail has seen strong demand in recent times, which aligns with the increased spending on electronics and homewares. These tenants are often destinations in their own right, and securing physical footprints in appropriate locations is a key part of their success. This divergence in demand is reflected in rental performance, as illustrated in Figure 1.
Figure 1: Auckland average rental growth p.a. by sub sector
Source: JLL New Zealand, 2Q21
There is also divergence by grade, with increased vacancies mostly observed in secondary stock. For example, Commercial Bay as a premium addition has been successful in attracting strong footfall, yet upper-Queen Street faces increasing challenges to attract and retain occupiers. The increasing divergence between location and grade is unlikely to change any time soon.
From an investment perspective, investors remain cautious about the sustainability and reliability of income. However, there remains a strong demand for and limited supply of defensive retail assets, being neighbourhood/suburban centres, non-discretionary based centres, and long-WALE retail. This stability is expected to remain short-term, supported by a favourable interest rate environment, the advantage of NZ-priced assets (relative to overseas markets), and a stable local economy.
Figure 2: Auckland average market yield by sub sector
Source: JLL New Zealand, 2Q21
Overall, although retail remains the most challenging of the core commercial property sectors, currently there is broad stability with variance depending on sector, location, and grade. The retail market in Auckland may be a diverging and transforming one, but there remains value and opportunity for well-positioned assets that resonate with the city’s population as preferred retail destinations.