Emporium Melbourne's opening delayed until 2014

Melbourne’s premier retail development, Emporium Melbourne has suffered a $59.4 million write-down following an independent revaluation by joint owner, CFS Retail Property Trust.

The project is now only scheduled to be completed by the first quarter of 2014 instead of an earlier December opening meaning retailers will miss out on the key Christmas trading period and New Year's sales.

The write-down applies to the 50% of the project owned by CFS Retail.

The other half of the project is owned by the Government of Singapore Investment Corporation (GIC).

The 15.5% revaluation means CFS Retail’s share of Emporium Melbourne is now worth $325 million with costs increasing from $575 million to $590 million for the A-REIT's share of the project.

The write-downs were the result of downward revisions to income assumptions and increased costs over the project, currently being built by Grocon on the corner of Little Lonsdale Street and Bourke Street.

Emporium Melbourne (pictured above and below) will replace the former Myer Lonsdale Street store and will offer over 225 stores of premium retail space over eight levels.

Confirmed tenants include Japanese retailer Uniqlo and UK retailer Topshop.

The gross leasable area of the complex is 48,000 square metres with Myer accounting for 7,000 square metres of retail space.

Goldman Sachs analyst Andrew MacFarlane repeated remarks made in April highlighting that “the vertical nature of the retailing offer inherent in the project risked suffering from a lack of tenant demand, and that timing over the development completion would be challenged given union and weather related issues that have faced the project”. 

Emporium Melbourne was the centre of a bitter dispute between Grocon and building union the Construction Forestry Mining and Energy Union (CFMEU), which blockaded the site between the 28 and 31 August.

In May, the Supreme Court of Victoria found the blockade was in contempt of restraining orders issued by the court.

“We have now seen these two risks transpire, with CFS Retail citing that while 75% occupancy (by income) has been secured, the subdued retail leasing market has impacted its income forecasts,” says MacFarlane.

“Similarly, development completion is now expected to occur in the first quarter of 2014, rather than by December 2013, with tenants set to miss the key Christmas trading period.”

CFS notes in its update that good progress is being made at Emporium Melbourne with the final concrete slabs that will form the floors being poured.

“Despite this progress, we have not been able to recover all the previously-advised lost time, and consequently we are now aiming to complete the redevelopment around the end of the first quarter of calendar year 2014," fund manager Michael Gorman.

“The delay has resulted in a $15 million (CFS Retail share) increase in forecast project costs, largely reflecting the additional interest costs to be incurred, bringing the revised total forecast project cost to $590 million (CFS Retail share).

“Leasing has progressed significantly in recent months, with approximately 75% of income now secured. However, in light of the subdued retail leasing market, we have revised down our income forecasts. The combination of lower income and increased costs has resulted in a revised target year-one yield on costs of approximately 5%.

The decline in Emporium’s valuation was offset by an upward revision of $32.2 million to its Chatswood Chase shopping centre on Sydney’s North shore based on improved income growth and discount rate tightening, which is now worth $845 million.

In total there were 19 assets re-valued for the six months to June 30, with he net result was a portfolio write-down of $20.7 million, or 0.4%.

The 30 assets comprising the fund are valued at $4.8 billion as of June 30.