The retail landscape in Australia is likely coming to a low point after its descent from the highs of the post-COVID spending boom.
On every metric it has been a difficult retail environment in Australia over the past 18 months as the cost-of-living pressures continue to flow through to retail markets. Interest rate rises of over 400 basis points, continuing energy cost increases and rapidly escalating mortgage payments have quickly eroded the spending power of many households (particularly in the outer suburban areas). This is especially impacting discretionary spending but is also now impacting food spending.
Vacancy rates in shopping centres surged in the COVID period and have remained stubbornly high, currently being over eight percent nationally. This is not however evenly spread as CBD areas in particular have borne the brunt of the impact.
Rentals across all retail assets have essentially been flat, which, in an era of high inflation means that real rental levels have actually declined. CBD markets again have seen the most significant rental declines.
By rights, with the current population boom, there should be a massive expansion of the nation’s retail footprint but, in actuality, current construction levels are extremely low, running at only circa 30% of long-term averages. This is due to the poor feasibility of new development with large construction cost increases and declining real rents. It is notable in particular that there are very few expansions of regional shopping centres being undertaken with most new developments comprising new neighbourhood centres in greenfield locations and generally small-scale ongoing development of large format accommodation.
On the investment side, at the top end of the market, values have been sliding for institutional-grade assets but a disconnect between book values and the revised return thresholds for institutional investors has seen an extended stand-off and low levels of transactional activity.
In the new year it is likely that we will start to see more transactional activity as existing buyers come to grips with the fact that we are not living in 2021 anymore.
At the lower market tiers (convenience and neighbourhood centres), there is still a high level of buyer demand for good quality assets and the yield softening has not been as pronounced, however there have been low levels of stock availability.
In the specialist asset classes such as fast-food and service stations, yields have measurably softened but in some cases (particularly fast-food), yields compressed to clearly unsustainable levels and the softening has been back to more historically sustainable levels.
Despite the difficult retail environment, not all is doom and gloom. Australia’s rapid population growth (currently running at over 500,000 people per annum) provides a very real and high level of base demand. Given the increasingly high barriers to entry for the development of new retail accommodation, there will be a catch-up point where sheer weight of numbers drives demand for new development. In the interim, the footfall for existing centres can only increase, even if the per capita spend levels remain flat.