Key Points:

The $470 million Sylvia Park shopping centre has suffered falling sales in the last few months, particularly over Christmas.

Stephen Ridgewell and Stephen Hudson of Macquarie Equities Research studied the Mt Wellington property's performance and found specialty store sales down 3.8 per cent in the last half of 2008 compared with the first half and overall sales down 2.3 per cent.

After adjusting for 4 per cent inflation, sales were down 6.3 per cent.

Christmas was "disappointing" and weak sales from June to September were hit by high petrol prices and interest rates which discouraged shoppers. October and November sales were slightly better.

This year, rents on stages one and two of the 70,818sq m property are up for review and contractually, owner Kiwi Income Property Trust is entitled to raise those by 8 per cent, the analysts said.

"However we believe KIP is more likely to settle for 3-5 per cent and so share some of the pain of a weak trading environment with tenants and earn their long-term goodwill," they said.

"If sales remain weak, we believe rents will eventually come under pressure. Most retail rent ratchet clauses are currently based on CPI plus 1 per cent or plus 2 per cent. In upcoming lease renewals, we believe that the premium of rent increases over CPI will reduce, possibly to zero."

The quality of Sylvia Park's sales mix has also declined. Supermarkets, paying much cheaper rents per square metre, enjoyed some growth but the speciality shops suffered despite major chains deciding to hold their sales early to boost revenue at the expense of profit margins.

The analysts cited other countries where retail was not a defensive investment. Irish retail rents fell 7.7 per cent in the final three months of last year and United States rents were down 4 per cent last year but predicted to fall a further 6 per cent. US retail vacancies are picked to hit 17 per cent by the end of this year.

The analysts rated Kiwi Income as "neutral" and reduced the unit valuation from $1.48 to $1.45. Kiwi Income was yesterday trading at 99c.

"We remain concerned about the decline in specialty retail sales and the flow-on effects to rents and vacancies over the medium term."

Rival mall owner Westfield wanted rent increases of CPI plus 1 to 2 per cent in the face of extremely challenging trading conditions, they noted.

"We understand that at least one major multinational chain has suspended further store roll outs until landlords lower their expectations."

Chris Gudgeon, chief executive of Kiwi Income's manager, said the Sylvia Park numbers were no surprise.

"We can all safely acknowledge we are currently in the grips of a global recession with a worldwide slowdown in retail spending. I wouldn't think there is a shopping centre anywhere that has not experienced a decline in retail sales.

"It is during these harder times that retailers prefer to be in strong regionally dominant centres which offer a full range of goods and services as well as attracting a growing number of customers. Sylvia Park provides a good formula for retailers. It is regionally dominant and growing in terms of its market share of its customer catchment. Pedestrian counts continue to show growth and we still have strong demand from new retailers to secure premises."

Gudgeon highlighted the attractive yields from the listed property sector and the fact that Kiwi Income had office real estate too.

"Our income risk is spread over 850 retail and office tenants spread between Auckland, Wellington, Christchurch, Hamilton and Palmerston North. Compare that with investing in a property syndicate where you are reliant on a handful of tenants at best, in one sector in one location. Also listed property provides great liquidity as opposed to many other forms of investment that many small investors find it difficult to cash out of.

"The New Zealand listed property sector was one of the best performing real estate investment markets in the world during 2008," he said.