Turley Retail Property Market Report

Retail Property Market Report 21 | 31 July 2015

Macro-Office-Industrial-Retail Full Reports | Buy at www.turley.co.nz/News

Q1-2 2015 Report Notes
Prime commercial-industrial property values continue to firm whilst Hawke’s Bay subprime property performance trails.

Low and trending down interest rates if sustained will positively impact commercial-industrial property values resulting in probably firming cap rates/ investment values/ land values.

Ongoing rebuilding and strengthening provides economic stimulus and this also affects the buildings supply and redundancy equation.

Temporary shipping container retail and green space site in Hastings reportedly 50% pre-let now deferred in favour of Hastings community.

Havelock North’s retail heart remains particularly strong with further development underway.

NZ economy commercial-industrial property effects will be assisted by a lower Kiwi dollar and lower interest rates but pulling against this is a confidence and dairy downturn. The elephant in the room is possibly Auckland residential property market risks for the economy.

Hawke’s Bay based Turley & Co is continuously engaged in commercial property analysis and valuation as a Registered Valuer and Registered Property Consultant.
Turley & Co since 1998 is a provider of high-quality property valuation and consultancy services nationally. 2009-15 as non-agency principal property strategist TCL project led property disposals of plus $27M and acquisitions plus $84M for private (corporate) and Council and Crown clients – since 1998 acquisitions-disposals nationally $455M.

Published 5 August 2015
CONTENTS
RETAIL MARKET INDICATORS FOR NAPIER | HASTINGS | HAVELOCK NORTH 3
HB Retail Market | News | Quick Summary 3
Hawke’s Bay Mainstreet Retail Shops Vacancy 4
Retail Rental Market 5
Retail Investment Market 9
APPENDIX 1 | DISCLAIMER & CAUTION 14

Retail Market Indicators for Napier | Hastings | Havelock North

Retail Category Rental Range
Gross | TOC

($/m²) Forecast Rental Growth Next 24 Months
(%) Yield Range

(%) Forecast Yield Change Next 24 Months

(%)
Prime
Secondary $200 - $550
$90 - $200 -5 to +10%
-5 to +5% 5.00-8.00%
8.00-11.50% -0.25% to 0%
-0.25% to 0%

Vacancy Rates: - Prime Retail 3.0-4.0% estimate
Secondary 4.0-15.0% estimate
Micro-locality considerations and quality dependant

Inducements: - Prime Retail 1 to 6 months rent free equivalent
Secondary 2 to 12 months rent free equivalent
Depending on premises, term and tenant

HB Retail Market | News | Quick Summary

Large Format Retail oversupply eases with significant take-up confirmed late 2014 into 2015
Napier mainstreet and fringes renewal/ intensification considerable improvement 2013-15
Hastings prime mainstreet consolidation (overall well-placed) but weakness exists for the other retail blocks and fringe CBD
Havelock North’s retail heart remains particularly strong with further development underway
Construction continues for multi-tenant “convenience” retail development on former service station site in Marewa
Hastings multi-banking hub created after Kiwibank occupied new premises that is significantly positive to Hastings CBD
Temporary shipping container retail and green space site in Hastings reportedly 50% pre-let now deferred in favour of Hastings community greenspace

Hawke’s Bay Mainstreet Retail Shops Vacancy

Turley & Co retail vacancy survey June 2015:

Centre Locality | Street(s) July 2015
Vacant Shops January 2015
Vacant Shops January 2014
Vacant Shops
Hastings Heretaunga Street (Karamu Road – King Street) 9 (2) 7 2
Heretaunga Street (King Street – Nelson Street) 7 (3) 10 No survey
Napier Upper Emerson Street 1 (1) 2 4
Ocean Boulevard Mall 4 (no change) 4 No survey
Lower Emerson Street 6 (1) 7 1
Hastings Street + 3 (no change) 3 5
Dickens Street 7 (no change) 7 No survey
Taradale Gloucester Street Main Strip 5 (1) 4 11
Havelock North Te Mata Road, Napier Road, Havelock Road, Middle Road, Porter Drive, Joll Road, Columbia Way, Treacher’s Lane 3 (1) 4 3

+Excludes redevelopment sites where buildings since demolished (Hastings Street Napier).
Retail Rental Market
Hastings
In contemporary times rent value and general performance of elongated mainstreet Hastings has generally trailed that of central Napier (that is more compact). Hastings prime-retail vacancies were at 10-15 year record lows in 2007 and CBD retail rent growth was generally strong 2003-07. Occupancy peaked in 2008 followed by mostly flat or moderating mainstreet rents. Retail fringes softened exacerbated by seismic concerns 2011 onwards.

The 2012 consolidation of Farmers to a new development on the shoulder of the 200-Block (and adjoining TSB), considerably improved pedestrian traffic in this locality and is overall positive for mainstreet Hastings. Units in the inner-city former Farmers store were leased in late 2012 to Caroline Eve, PaperPlus and Cotton On. This site reuse is excellent for the retail heart of Hastings. This property is currently advertised for sale with a total net passing rent exceeding $550,000 pa.

The other former Farmers site at the corner of Queen and Market Streets in conjunction with parking on neighbouring land (the County Club building was demolished), is now the site of Kiwibank’s development (including some Wellington devolved banking operations). Banks now occupy all four corners of the Queen and Market Streets intersection.

Stortford Lodge corner site is currently under development for Bay Ford and Bay Motorcycles new showroom and yard.

Current demolition and transformation of the historic Albert Hotel into CBD greenspace and fold-out performance container, should generate vibrancy and benefit the surrounding area. HDC has taken a 3 year lease of the space. Originally proposed for temporary shipping container retail, it appears take up was insufficient.

Bay Plaza (formerly Kmart Plaza) saw 2013-14 rationalisation and partial redevelopment by new owners to apparently very good effect. This site has historically recorded the highest pedestrian foot traffic in Hastings. It appears to be performing better than was the case pre-2014.

In summary: Hastings mainstreet prime location retail vacancy over Q1-2 2015, has increased and rents are mostly stable. The fringe is much weaker still.

The best NZ/ Australasian retailers are now omni-channel focused with dual strategies: online virtual retail combined with physical stores. This is an international trend. Amazon that was an online retailer is rolling out physical stores in the US. The Warehouse, Noel Leeming, DSE, Kathmandu, Rebel Sports are some NZ examples.

Napier
Most Emerson Street retailers were much less bullish through 2011-14. However, we expect still ongoing firm demand by leading retailers for prime Napier locations. ANZ consolidated to its owned National Bank premises. Pascoe’s Jewellers and Pretty Nails took new leases within ANZ’s former premises, both reflecting firm rents. Farmers relocated to Hastings Street and multiple retailer’s backfilled its original site including Cotton On, Acquisitions, Backdoor Surf, Merric and Icebreaker (with strong rents). This redevelopment property is for sale.

The Farmers shift bolstered Napier’s retail heart and improved the stature of Hastings Street, as an important CBD and Marine Parade retail link. Lower Emerson Street continues to feel the pinch from this re-shuffle (experiencing much higher vacancies). Upper Emerson Street vacancies are modest in contrast.

Recent years Hastings Street developments spurred on by Farmers’ actions include the Paxies site into 4 retail tenancies, the Commercial Building at the corner of Dickens-Hastings streets into a new split-level retail complex anchored by Kathmandu and the 3-story Post Office building, into further speciality shops and upper floor office. It includes reconfigured retail frontage to the Dickens Street public car park (corner position leased to Vodafone). Adoro Café sits prominently on the corner of Hastings-Dickens Streets, NZ Post now occupies frontage to Hastings Street. The building still contains many newly created shop vacancies.

The nearby Raphael’s Building was purchased by adjoining owners and demolished November 2013. It has since been acquired by a neighbouring developer. The former Williams Building has been demolished in the short term to supplement car parking for adjacent Cosmopolitan House tenants, until sufficient retail or office demand exists to build.

It appears the Hastings Street (Napier) development boom has cooled on the back of currently some oversupply of redeveloped floor space.

Taradale
Several new lettings occurred 2011-12 for the very confined Taradale retail precinct but at rents much reduced to past highs. Total shop vacancies since mid-2014 have reduced from 11 to 5 (refer to prior insert Hawke’s Bay Mainstreet Retail Shops Vacancy). The popularity of eateries and takeaways in Taradale is noticeable. Other new shops include florist, craft, fresh produce and other local retailer businesses.

Havelock North
Havelock North’s commercial precinct expanded considerably over 2000-12. This tightly-held predominantly retail-hub consists of specialty shops, banks, restaurants and bars. Retail vacancies were close to non-existent 2003-12, notwithstanding significant retail accommodation increases (that included retail migration to traditionally industrial sites in Havelock North). Occasional shop vacancies were seen mid-to-late 2012 and 2013, but these reasonably quickly re-tenanted.
Subway was the first fast-food chain to establish in Havelock North in 2009. McDonald’s restaurants opened at Havelock North in late 2012. The French Bakery established new premises in Joll Road in 2011.

Havelock North retail rents were mostly near static over 2009-13. Rent reviews since reflect some growth but with patchy true-test new letting evidence.

A split level retail-office building is being built next to BNZ on Joll Road for Tremain’s realty occupancy. LowMac’s $25M Village Exchange hotel development (refer to Office Report) includes up to 9 retail tenancies. This will add high-end retail shops supply in Havelock North. Foodstuffs Havelock Road 2014 land purchase (current Tumu ITM and adjoining sites) and new supermarket plans are currently unclear – it proposes a new supermarket with retail shops to replace its existing fringe Havelock North New World store. Timing is potentially well-deferred.

The existing supermarket site redevelopment would release space for more speciality shops with possibly short-term negative effects for some existing Havelock North businesses (but potentially also short-term rents moderation). Havelock will be long-run commercially stronger by expansion and increased activity. The Village Exchange is part of this dynamic. We expect the three-storey Village Exchange multi-use development will have mid-term major positive property effects for the Havelock North.

The fringes of the Havelock North commercial area continue to strengthen.

The mid-term outlook for Havelock North retail remains excellent underpinned by its increasing commercial significance and also, relatively tight commercial property supply. Havelock North’s residential property creep onto formerly rural land and coinciding increasing population are other future strength factors.

Large Format Retail (LFR)
LFR was understandably lacklustre over 2009 into 2010 but since mid-2010, this retail subset experienced considerable activity.

The Nelson Park site at Hastings became the focus of Sydney based Charter Hall buildings for initially The Warehouse and Fishing Camping & Outdoors (FCO). FCO has since stopped trading. Mitre 10 Mega in 2012 occupied its development as a landowner at The Park and joined later in 2012 by Angkor Wat Kiwi Bakery and Uncle Bills in small and mid-scale units originally built without tenancy pre-commitment. Charter Hall in late 2013, divested from FCO and the remaining 9,000 sqm LFR development land. Noel Leeming this year occupied new premises at The Park further strengthening this LFR cluster.

Mitre 10 and The Warehouse former Hastings premises were offered in 2012 to lease as subdivided. Warehouse Stationary relocated to the middle unit of the former Mitre 10 site. Late 2014 PK Furniture joined the same address, now one-third of the former Mitre 10 remains vacant.

The former The Warehouse site in Hastings is subdivided and now partially leased by The Clearance Shed. Hastings Countdown was acquired by a local developer (we believe as a result of a mainstreet Hastings investment property exchange in May 2014). The developer has also acquired the neighbouring RSA building (reportedly for $3.3M), as Countdown wishes to expand (refer to Macro Report). This would assist the heart of Hastings.

In Napier, Big Save Furniture relocated to the larger Pandora Bunnings premises in December. Placemakers relocated to redeveloped premises at Corunna Bay Pandora. Harvey Norman recently opened in Wellesley Road’s Balmoral Centre and Noel Leeming expanded its footprint into Godfrey’s adjoining premises. Godfrey’s has since shifted to Carlyle Street’s cluster of stores.

Overall there has been a spike in bulk-retail or LFR activity, considerable vacant space has backfilled by a handful of new and existing National and Australasian retailers towards the end of 2014 and into 2015. These retailers are positioning for competitive advantage and future growth but potentially drawing some consumers away from CBDs.

Napier | Hastings | Havelock North Retail
Sample retail rents per Total Occupancy Cost (refer to TOC Definition later):

Property Date Area (m²) Rate $/m² TOC
Waipukurau Jun-14 227.8 $42.00
King St Nth Oct-14 174.0 $90.17
Napier Rd Apr-15 77.0 $202.16
Gloucester St Feb-15 173.0 $215.00
Joll Rd Feb-15 214.7 $226.73
Middle Rd Apr-15 96.5 $308.50

TCL is aware of a recently leased 4sqm Gelato store in Auckland CBD Queen Street for net $7,500 per sqm being market rate contrast.

Mainstreet retail evidence typically reflects a tighter rates pattern if analysed per UMF (frontage relative to depth). Registered Valuer assistance should be retained for mainstreet retail relative values assessment www.turley.co.nz

Market rent is principally objective over subjective and is determined according to established valuation case law principles. Turley & Co Registered Valuer assistance should be preferred.

Retail Investment Market
Good retail property is always the most buoyant investment property subset well-supported at the keenest cap rates (lowest yields). At values up to $2.0M, well-located and sound building retail property investments are always hotly contested. Yields are often below 7.0% and sometimes sub-5.0% (so high relative investment property values apply for retail property). Below 5.0% has been prevalent in Auckland.

Well-situated mainstreet shops are typically readily relet. If the location is strong the vacancy risk is generally modest and rents stable at least. It is about location but also today seismic performance. Some locality dynamics change, e.g. Hastings Street Napier and within Havelock North change trends.

The incidence of retail investment property transactions has been fairly high into 2015 (refer next). Well-tenanted retail investment properties rarely present in the market for long and many sell off-market.

Retail Investment Transactions
Sample retail property investment sales include:

Location Price Date Yield
Joll Rd - Oct-14 4.95%
Hastings St $1,160,000 Nov-14 7.04%
Napier Rd $890,000 Oct-14 7.42%
Carlyle St $1,120,000 Oct-14 7.60%
Dalton St $1,000,000 Jan-15 8.31%
Emerson St $535,000 Mar-15 9.57%

Refer to Turley & Co for information specific to a property and for Registered Valuer and Registered Property Consultant advisory www.turley.co.nz

TOC Definition

Gross rent or TOC (Total Occupancy Cost) rates cited in this report include primary tenancy outgoings: Council rates, building insurance and unique occupancy costs. Tenancy opex are excluded from TOC.

TOC rates reflect a sealed bare shell by deducting the estimated market added value of landlord fitout: flooring treatments, subdivision partitioning, air-conditioning, etc.

TOC rates are also net of car parking and possibly excess yard value and are often stated net of corner site added value.

TOC rates generally reflect effective rates so are adjusted for the value of known letting inducements (frequently a market feature in but often undisclosed).

TOC rate definitions apply for all sample rent evidence cited in this report. Reliable and rates safe interpretation requires Turley & Co Registered Valuer input www.turley.co.nz

Report Users Caution | Disclaimers

Report Users Caution
Please refer to the user terms and cautions Appendix 1.

Sources | Reliability
Turley & Co has been a valuer analyst or advisor for many of the cited transactions. We have otherwise gained data from thought to be reliable sources. TCL cannot guarantee the accuracy or reliability of all market data recorded in this report.

Caution | Sample Data
Rent samples are incomplete and include: dated existing and newly-built premises, ground and upper-floor, first-lettings and sitting-tenant agreements, properties of differing location strength, scale, lease content, seismic status, etc. These items are relative market value considerable influences. Without Registered Valuer assistance the value rates cited in this report may be incorrectly interpreted. The same caution applies for cited cap rates (yields).

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