- It is anticipated that retail spending growth will remain sluggish throughout 2023
- Investment yields for certain retail properties may further decrease in 2023
- Hope is on the horizion as higher levels of sales transaction activity are anticipated towards the back end of the year
Headwinds for consumer retail spending are likely to have repercussions for commercial retail assets across Australia according to Herron Todd White‘s latest Month in Review report.
Herron Todd White Director Vanessa Hoey highlights in the report that monthly retail trade figures have been relatively volatile recently.
“Retail turnover rose across all states and territories in January 2023 in contrast to the
negative results recorded in December 2022,” she said.
According to the Australian Bureau of Statistics (ABS), there was a 1.9% increase in monthly retail turnover in Australia in January 2023, after a 4% decline in December 2022.
“The overall trend demonstrated by the ABS figures is that growth in retail spending has been very subdued,” Ms Hoey points out in the report.
Headwinds for consumer spending
Consumers are feeling the effects of the recent string of interest rate rises with the increased cost of borrowing placing substantial pressure on many household budgets.
Along the same lines, the impending fixed rate cliff will see many households face steep increases in repayments, tightening their spending budgets.
“Growth in retail spending is expected to continue to remain low throughout 2023,” Ms Hoey explains.
“Consumer confidence has been significantly dampened by higher inflation and the impact of recent and expected further interest rate rises.”
Consumer Sentiment Index
In the Westpac-Melbourne Institute Consumer Sentiment Index, consumer sentiment dropped by 6.9% in February 2023 to 78.5. This placed the index only slightly above the level seen at the beginning of the COVID-19 pandemic in April 2020, and below the lowest recorded index of 79 during the Global Financial Crisis in 2008.
Sentiment has since seen some improvement but still remains dampened compared to long-term trends.
Leasing conditions remain challenging
Rising costs, such as wages and energy, coupled with reduced retail spending, are putting pressure on the affordability of rents and other outgoings for retailers.
“In many areas of Australia, retail leasing conditions remain challenging and downward pressure on rents for retail tenancies is evident,” Ms Hoey explains in the report.
The Month in Review suggests that tenants in the retail market are currently seeking greater flexibility, including shorter lease terms, and are negotiating for lower rents and higher incentives such as discounted rent or rent-free periods upon the start of new leases or renewals.
Retail property
The outlook for the retail investment market in 2023 is expected to be mixed, with outcomes predicted to vary between sectors and regions.
“Due to current economic uncertainty, the effects of higher inflation and rising interest rates, some retail property asset types are likely to experience a further softening in yields and a further correction in values,” Ms Hoey says.
The Month in Review report suggests that assets in secondary locations and areas with low tenant demand and high vacancy rates are particularly at risk.
“Investment yields are likely to continue to soften for some retail assets during 2023.”
Due to their high exposure to discretionary retail spending, sub-regional shopping centres are likely to see cooler results this year.
In recent months, there has been a slowdown in the volume of sales transactions of retail property assets throughout Australia.
“There appear to be fewer active buyers and sales are taking longer to transact,” Hoey explains in the report.
“Higher levels of sales transaction activity are anticipated during the second half of 2023 once greater certainty around the upper level of interest rates is achieved.”
Investors, particularly those with strong cash reserves or good borrowing capacity such as high net-worth buyers, are expected to maintain a good level of demand for quality retail properties in strong retail locations.
