Australian retail property sector finally showing signs of recovery

Leasing demand has been strong despite a subdued growth in retail spending.

The retail property sector in Australia is showing encouraging signs of recovery. In a report, Dexus Research noted that it is outperforming other commercial real estate sectors after a challenging period in recent years.

While retail unlisted funds posted a modest total return of -0.5% in the year to November 2024, they significantly outperformed the broader market's -9.0% p.a. return.

Here’s more from Dexus Research:

On the occupancy side, leasing demand has been resilient in the face of generally subdued spending growth. Melbourne and Sydney regional shopping centres are experiencing declining vacancy rates. Occupancy costs are below pre-pandemic levels, creating a buffer for both tenants and landlords. The lower cost base provides runway for future rental growth without putting excessive pressure on retailers.

The supply side of the equation is looking particularly favourable for existing assets. Construction costs and planning restrictions are acting as natural handbrakes on new supply. Consequently, the new supply pipeline of subregional and regional space is running at just 70% of the 20-year average. There are no new regional shopping centres in development.

The investment case for retail property has strengthened considerably. Yields have been more stable than other sectors, and some sub-sectors, like Sydney neighbourhood centres, are even seeing yield compression. Over the past decade a shift in shopping centre category mixes to include more services and experiences has made cash flows more secure which may be leading to a re-evaluation of risk premiums.