Australia’s retail sector to emerge from the long night

There is an improvement in investor sentiment on account of strong indications that the yield cycle has stabilised. Additionally, the sector is being strongly underpinned by the high levels of immigration, price inflation, and improving consumer sentiment. As a result, the number of retail transactions is now firmly trending upward, reflecting far more positive market sentiment towards this sector.

At the shopfront level, the past three years have seen an extremely challenging retail environment, and retailers have borne the brunt of the adverse economic circumstances. These have seen higher interest rates and significant pressure on household discretionary expenditure. As a result, rents have been stagnant and in many localities vacancy rates have been high. However, rentals have stabilised and are likely to start to grow, whilst turnover is starting to trend upward.

Australian retail spending is slowly recovering, having risen 3.5 per cent year on year to November 2024. This is not evenly spread across the country however with Queensland having the strongest monthly turnover increase of the eastern states whilst New South Wales is the most sluggish.

Australia’s population surge is creating strong underpinning demand. However, due to the adverse conditions impacting retail investment markets and surging construction costs, supply has not kept pace with this demand. In simplistic terms, there is a requirement for the development of circa one square metre of retail accommodation per capita, yet actual construction has fallen far short of this benchmark for some period. At some point, this shortfall in accommodation will build pressure for the development of new accommodation.

In specific retail markets, the situation varies across asset classes. At the low end, for high street retailing, convenience centres and single tenant large format complexes, rents are largely stable, whilst investor demand is strong, albeit that yields have softened by up to 100 basis points from the market peak.

For neighbourhood centres, investment yields have softened slightly but remain resilient. These centres have also been the beneficiaries of the population boom, with ongoing demand for properties in strong growth localities.

At the institutional level, the market correction is largely complete and the demand for high end assets is increasing, albeit that the availability of stock has been limited.

In the online world, the rate of growth of market penetration is slowing, and all major retailers have now established a mix of physical and cyber retailing. The requirement for physical stores is now fully evident and we foresee a relatively symbiotic relationship in years to come.

The landscape for new retail development remains challenging with the rapid increase in construction costs and the complexity of establishing new larger centres presenting the greatest challenges. There is no doubt that new development will require strong significant rental growth, but this is difficult to achieve when broader economic conditions for retailing are difficult.