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Luxury brands buoy Sydney retail rents

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Luxury brands buoy Sydney retail rents

Global luxury brands are on an expansion spree in Sydney, pushing up retail rents in the city's prime spots, market observers told S&P Global Market Intelligence. Landlords such as Scentre Group, GPT Group and Vicinity Centres, which have prime or super-regional malls in their portfolios, are likely to benefit from the trend.

In 2016, international retailers including U.S. electric luxury car maker Tesla, Swiss watchmaker Franck Muller and Italian fashion brand Bottega Veneta opened their first stores in Sydney. Brokers at CBRE expect the year ahead to see big names continue to enter the Sydney marketplace or look for flagship space. French jeweler Van Cleef & Arpels plans to open at 112 Castlereagh Street, and Swiss timepiece brand Chopard will roll out a flagship store at 119 King Street.

Major global retailers are coming to Sydney for a foothold in a relatively unsaturated luxury market that is also underpinned by its affluent resident population and the strong spending power of increasing Asian tourists, according to Leif Olson, CBRE's head of retail brokerage leasing in Australia. Sydney is a relatively untapped market for luxury retail, compared with other first-world shopping hot spots in Asia-Pacific such as Hong Kong and Singapore, Olson said.

The market is growing, however. Luxury retail revenue rose 11% per year over the last five years to A$1.8 billion in 2016-2017, and is expected to grow at more than 8% to 2021-2022 to reach A$2.7 billion according to data from business intelligence group IBISWorld as reported by Business Insider Australia.

The falling Australian dollar makes domestic shopping more attractive than looking abroad and is attracting more inbound Asian tourists, especially the luxury-loving Chinese, Olson added. According to the latest data from Tourism Australia, China is forecast to overtake New Zealand as Australia's largest inbound tourism source in 2017-18 and account for more than one-fourth of total visitors to Australia by 2024-25. Chinese tourists spent A$8.3 billion in 2015 and are expected to generate A$13 billion in annual expenditure by 2020.

The influx of luxury brands into Sydney has created heated competition for retail spaces at prime locations in the central business districts, including Castlereagh Street and King Street, according to Alex Pham, Knight Frank's senior research manager for New South Wales.

"Prime sites within the CBD remain in high demand from international and local retailers," said Pham. Driven by the strong demand and the limited availability of flagship sites, the vacancy rate in Sydney's core retail areas dropped below 2% in 2016, from around 3.5% a year earlier, he said.

Meanwhile, retail rent in the prime precinct increased considerably over the past year, he added. For example, average gross rent on Castlereagh Street is now up to about A$7,000 per square meter per year, an increase of about 9% over the past year.

Looking ahead, there is likely to be elevated demand for retail space from foreign retailers seeking a presence or expansion in Australia, according to Macquarie analyst Paul Checchin.

International retailers, including those from the luxury sector, have taken up approximately 200,000 square meters of shopping center space in Australia over the past few years, the analyst said. Nonetheless, foreign retailers still have about 183,000 square meters of space demand in aggregate in the next few years, he said.

"The level of demand from international retailers is a positive for super-regional centers that support a high-end fashion mix," he said.