Capital Markets Investment Review 2023

Retail Capital Markets

Investment Review 2023

After navigating the choppy waters of the pandemic years, the Australian retail market has faced yet more challenges in 2022; namely rising inflation and interest rates. Despite the macroeconomic headwinds, the retail sector has continued to show its strong resiliency and exceeded expectations, continuing to pose an attractive long term defensive investment proposition.

Encouragingly for the retail sector, the ability of retail rents to maintain pace with inflation is far greater than other commercial property sectors on a two fold basis; with CPI backed lease reviews more commonplace in retail, and turnover rent for major tenants proving a defensive mechanism in the face of rising costs.

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1.

2022 was a game of two halves; after a strong start to 2022, investment volume moderated in the second half of the year.

The latter half of 2022 saw investment activity taper off from record levels seen in 2021, as the shift in the macroeconomic landscape started to flow through to capital markets. The rising interest rate environment translated to a spike in borrowing costs, leading to a price expectation gap between vendors and purchasers.

2.

Significant undeployed capital remains in the market, with a quality over quantity approach underway.

With many in the market adopting a ‘wait and see’ approach in the latter half of 2022, evidence of the Australian economy’s tempering of inflation will undoubtably lead to momentum for transaction activity in 2023. Unlike other periods of economic uncertainty, there is no deficiency of capital in the market; and quality assets located in strong catchments continue to source high demand, regardless of any market conditions.

Institutional investors accounted for 34 per cent of total investment value, acquiring a diverse range of asset types; with particular appetite for Sub-Regional and Neighbourhood Shopping Centres.

3.

Australian retail is well placed on global context to see through the current macroeconomic climate

With a higher disposition towards experienced based stores and supermarkets, Australian retail is less exposed to the threat of online penetration. Notably, premium retail destinations in other markets don’t provide the fresh food precincts and supermarket offerings that have become synonymous with Australian retail; and uniquely place these assets to provide an everyday needs offering that supports discretionary spending.

The retail sector in Australia has been re-proven as an asset class; with retail rents showing the ability to maintain pace with inflation, limited new supply and Australia’s robust population prospects.