Inflation supporting steady retail performance
Steady retail returns supported by inflationary pressures on income. Image: Canva.
  • High interest rates have paused investments
  • Investors steadfast on New South Wales and Victoria despite lower income returns
  • Neighbourhood and sub-regional centres outperforming larger retail centres

The breaks on investment are firmly on, with retail once again pondering the impacts of e-commerce and tightened purse strings. While commercial sales generally slowed, one segment gave the inflation doldrums the slip.

Spotlight on retail

Ray White Head of Research, Vanessa Rader, said retail shops remain the top investment pick across sub-$5 million commercial sales, with their affordability enticing the smaller investor market.

Recent research from PCA/MSCI Australia All Property Digest shows robust income returns for retail assets across the nation, partially achieved by the high inflation rates. Thus, retail asset owners continued to profit from steady, climbing income streams despite the anxieties surrounding capital appreciation.

Strong retail income returns aiding total returns growth

Strong retail income returns aiding total income growth
Year to March 2023. Source: MSCI Inc.

New South Wales (NSW) and Victoria demonstrated positive capital growth of 0.6% and 1.6%, respectively, in the year to March 2023. On the other hand, Queensland and Western Australia have dropped to -1.5% and -3.4%. Rader explains that investors remained partial towards NSW and Victoria, even though Queensland and Western Australia continue to post robust income returns at 6% and 5.4%, respectively.

Yet, total returns by states as of recent years indicate a new trend of diminished confidence across the asset class. The five-year average returns of Western Australia and Queensland are at an annual figure of -0.5% and 0.8%. Meanwhile, NSW and Victoria’s returns stand at 2.9% and 2.3%.

When stepping back and considering the results over the past ten years, retail returns have demonstrated healthy results over the long term, averaging at 7% per annum for NSW and just under 5% for Western Australia and Queensland.

Total returns for retail head down after investment peak

Total returns for retail head down after investment peak
Source: MSCI Inc.

Rader also highlights the association between retail returns and asset class—how consumers change their interactions with different types of retail centres and how this change in consumer behaviour affects retail returns. The supplied chart shows the impact of economic disturbances like the global financial crisis and COVID-19 on retail assets and their performance.

Shopping locally

Super and regional centres have demonstrably suffered during the recent pandemic, venturing deep into negative territory before bouncing back, albeit at a lower rate than their sub-regional and neighbourhood counterparts. The recovery of super and major regional centres was attributed to their ability to adapt swiftly to occupancy pressures and business closures, focusing on entertainment and food to entice customers to return.

Neighbourhood centres fared much better, recording a smaller decline and peaking higher this cycle when compared to their larger equivalents, as consumers chose to shop locally. Likewise, sub-regional centres experienced steady returns over the past decade, with discount department stores like K-Mart growing in popularity recently, attracting more investor interest in the sub-regional areas.

The healthy total annual returns of these smaller centres, 8.6% for neighbourhood centres and 7.4% for sub-regional centres, have outperformed that of the larger super and major regional centres and regional centres, which posted returns of 4.8% and 5.9%.

Rader predicts that income growth will become a mainstay across retail assets because inflationary pressures are projected to stay above the target average until 2025. Lease and new tenancies expect continuous increases of around 5% between most types, while capital returns remain low.

The current consumer predisposition for shopping locally is expected to see the neighbourhood and sub-regional centres prosper. Meanwhile, the larger centres will abandon their reliance on traditional retailers to draw more visitors.

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