Vacancy rates have remained stable amidst a muted sales environment.

The retail sector in Australia appears to have reached a significant inflexion point after a challenging period over the past five years, including interruptions to trading during the pandemic, according to a recent report from Dexus Research.

Here’s more from Dexus Research:

Shopping centre fundamentals are generally positive. Vacancies across shopping centre types have held relatively steady despite the weak sales environment. Melbourne and Sydney have seen a small uptick in vacancy while vacancy has declined in Adelaide and Perth. 

Lower occupancy costs than before the pandemic will help preserve occupancy levels and provide room for future growth in shopping centre rents. Rents are responding, as evidenced by both Vicinity and Scentre Group reporting positive releasing spreads over the past year.

A lack of new shopping centre supply is another positive, particularly given population growth is adding to aggregate demand. The supply of enclosed shopping centre space projected over the next two years is around 70% of the 20-year average, and there is no development of regional shopping centres. Supply of shopping centre space is being held back by construction costs and planning constraints.

The retail sector is looking compelling on a relative value basis. Yield expansion has been milder than the other main real estate sectors and total returns for retail funds in Q3 2024 of -0.5% p.a. exceeded the ‘All funds’ index of –9.0% p.a. Yields have been broadly flat on a quarterly basis, with no expansion recorded for any shopping centre class and even some marginal contraction for Sydney Neighbourhood shopping centres.