Despite the challenges faced by retail tenants during lockdowns, certain sectors, such as the luxury end of the market, have continued to perform well.

According to Vanessa Hoey, Director at Herron Todd White, the areas that remained strong during the pandemic have continued this trend. Hoey stated that although leasing conditions are challenging in some areas, there is still strong demand in prime locations, particularly from food and retail service tenants.

Certain retail leasing segments, like international luxury goods retailers, have exhibited strength in recent months as they seek to expand their retail presence in Australian CBDs. These tenants are looking for more flexibility, including shorter initial lease terms, and are negotiating lower rents and higher incentives like discounted rent or rent-free periods at the start of new or renewed leases.

According to Hoey, the overall volume of retail property asset sales transactions has slowed in recent months due to economic uncertainty, higher inflation, and rising interest rates. As a result, some retail property asset types may see a softening in yields and correction in values. The combination of reduced retail spending and increasing costs such as wages and energy puts pressure on retailers’ ability to afford rent and other expenses. However, recent resilience in retail spending may be due to delays in passing on higher costs to borrowers and a high percentage of mortgage holders with fixed rates, which are set to expire in 2023.

And the retail investment market has slowed as interest rates have risen.

Investor demand for retail properties in secondary locations has significantly decreased since the implementation of recent cash rate increases, especially in areas with low tenant demand and high vacancy rates. However, there is still strong demand for high-quality retail properties in strong retail locations from investors, particularly high net worth buyers with strong cash reserves and good borrowing capacity.

According to Hoey, there is still high demand for investment in neighborhood shopping centers, freestanding supermarkets, and fast-food outlets with long-term leases to major national tenants as buyers seek more security in the current market.

Opportunistic investors with access to capital are looking for more stable assets with a stable income by redirecting their funds to properties with secure long-term leases to major national operators, and reducing their exposure to riskier property types.