By Dominic Brown, Head of Research, Australia & New Zealand
In Cushman & Wakefield’s recently released Australia Retail Investment Outlook 2016 report, we have identified five key drivers of the Australia retail sector for the year ahead.
1. Economic growth improving but risks remain
The Australian economy is expected to achieve positive though sub-trend growth in 2016, with weaker growth in the residential sector and an ongoing recovery in service industries expected. World economic growth is expected to slow from an estimated 2.5% in 2015 to 2.3% in 2016.
Recent volatility emanating out of China has increased downside risks and global growth forecasts for 2016 are lower than a year previously. However, the most likely scenario continues to be the baseline of ongoing recovery, though equally there appears little chance of an upside recovery.
2. Broader based recovery in discretionary expenditure
For the first time since 2004, calendar year discretionary retail expenditure outperformed non-discretionary over 2015, mainly driven by strong growth in Household Goods sales. Solid discretionary sales performance is expected to continue in 2016 and should be across a broader range of categories than in 2015. Price wars between supermarkets are likely to continue to supress food expenditure.
Key drivers of sales growth are expected to be improved sentiment, a decline in the household savings ratio, and the continuing low interest rate and exchange rate environment. However this will be tempered by sub-trend economic growth and relatively soft income growth.
3. Increasing residential density to drive ongoing MAT performance
Enduring benefits will be felt from the current housing market cycle. Catchment populations for inner city centres will continue to increase as new unit towers are completed, while the number and size of centres is expected to be little changed.
While most existing centres should benefit from this increase in catchment population through increased MAT, it is those centres that are most conveniently located that are expected to experience the strongest uplift. Accordingly, centres with large catchment populations located within walking distance, or centres located on major public transport infrastructure routes have strong potential to outperform.
4. Investment volume to be maintained but liquidity will shift
Retail transaction volumes are expected to stay relatively high in 2016, supported by the ongoing hunt for yield in a low interest rate environment. However, growth in transaction volumes is likely to be limited by stock availability, both on and off market. As a result, limited further compression in yields is likely.
The majority of investment transactions will continue to be derived from neighbourhood and sub-regional centres in 2016. However, we expect above average liquidity for large format retail. The resurgence in homewares expenditure could encourage some owners to unlock value in these centres and offer them to market. Further liquidity could be derived from the sale of Masters stores if a purchaser for the company cannot be found.
5. Catchment fundamentals are the greatest drivers of risk-return
Australian retail property as a whole remains a relatively attractive investment with further yield compression likely across the main categories. However, with little difference in risk-return profiles between retail centre categories over the longer term, stock availability and local factors remain primary considerations in investment choice. Inner city centres are expected to be one of the stronger sectors, based on strong growth in catchment populations combined with high barriers to entry for new competing centres.