Retail property sector shows signs of recovery

It outperforms other commercial real estate after down years

Retail property sector shows signs of recovery

Australia’s retail property sector is demonstrating signs of resilience, emerging as a bright spot within the commercial real estate market.

According to a recent report by Dexus Research, retail property is outperforming other segments after facing significant challenges in prior 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% per annum return,” said Peter Studley (pictured above), head of research at Dexus Property Group.

While retail unlisted funds recorded a modest total return of -0.5% for the year ending November 2024, this performance was notably stronger than the broader market’s -9% annual return.

In terms of occupancy, leasing activity has remained steady despite subdued consumer spending. Regional shopping centres in Melbourne and Sydney have reported declining vacancy rates, supported by lower occupancy costs compared to pre-pandemic levels.

“The lower cost base provides runway for future rental growth without putting excessive pressure on retailers,” Studley stated in the firm’s Australian Real Asset Review report.

From a supply perspective, the outlook favours existing assets. High construction costs and strict planning regulations are limiting new developments, with the pipeline for subregional and regional retail space running at only 70% of the 20-year average. No new regional shopping centres are currently under construction, further stabilising supply. 

The investment case for retail property is also strengthening. Yields in the sector have remained more stable compared to other commercial property types. Some segments, such as Sydney’s neighbourhood centres, have even experienced 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,” Studley said.

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