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Headwinds from the pandemic have finally started to ease for retail, which is experiencing a burst in buyer demand that’s expected to be sustained throughout the year.
Knight Frank reported that the “wait-and-see” approach that dominated retail sentiment in 2023 has given way to a willingness to act, with the firm noting a definite return to confidence evidenced by a constant flow of transactions in the sector.
Knight Frank Australia’s head of retail investments, Campbell Aitken, explained that the firm was particularly seeing interest from investors who had previously ignored the retail sector in favour of the office market. Now, they are a prime cohort “among the buyers looking at retail more closely, identifying the positive fundamentals of this asset class”.
Furthermore, Aitken said that with average consumer spending expected to remain flat despite recent inflation, investors are feeling positive about the continued stability in the sector.
“The cost of goods, and hence most retail items, stopped rising quickly after a big spike in 2021–22 and high inflation is now mostly driven by services such as insurance, healthcare, housing and utilities. Essentially, this means households are spending more on non-retail items, while price growth for retail goods has generally risen at a level below CPI,” Aitken explained.
“While real disposable income has fallen, which can impact discretionary spending, this is expected to improve from here on, with tax cuts, rising wages and lower inflation all contributing to a return to growth in H2,” he added.
Overall, the firm reported that consumers are still consistently spending money at existing shopping centres, with retail sales proving to be resilient.
But it’s investors with a keen eye on population growth who are preferencing the retail sector in particular, with an increase in migration being a primary driver of confidence.
“Even if consumers do cut back on spending, the growing population, coupled with a lack of new retail supply, around Australia will underpin retail sales, and this is largely where investor confidence in the sector is coming from,” Aitken said.
“There is very solid demand for retail through the sheer number of consumers in Australia, which is growing all the time. Combine this with the limited number of shopping centres for them to spend their money at, and you have a solid investment case in the retail sector.”
With construction costs high, few new shopping centres are expected to widen supply in the sector in the years ahead, making the existing assets even more competitive.
“Naturally retail sales, and therefore rents in existing shopping centres, will grow as the surrounding population grows,” Aitken noted.
Who is buying?
Aitken shared that over the past 18 months, private groups such as individuals or syndicators have been the main buyers of retail, while REITs have only recently reemerged into the sector.
“Major REITs have used the last 18 months to tidy up their balance sheets and reduce their gearing, and it’s now evident that their focus is turning back to acquisitions rather than divestments,” Aitken shared.
During their absence from the acquisition market, he said that syndicators such as Fawkner, Haben & IP Generation stepped into the gap, becoming more active in their acquisitions and taking advantage of reduced competition.
“We have also seen private investors remain active, competing for smaller assets such as neighbourhood shopping centres where they are willing to pay sharp yields of 5.5 per cent to 5.75 per cent for the right asset,” Aitken noted.
ABOUT THE AUTHOR
Juliet Helmke
Based in Sydney, Juliet Helmke has a broad range of reporting and editorial experience across the areas of business, technology, entertainment and the arts. She was formerly Senior Editor at The New York Observer.
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