Following several years of challenging conditions, the retail property sector in Australia is set to experience a modest level of recovery as a slight upturn in consumer spending leads to a modest degree of tightening in the market.

Amid a rebound in sales and growing interest foreign retailers in prime CBD locations, sentiment surrounding the sector’s prospects is generally lifting.

CBRE, for example, expects rental growth across the sector to increase from 1.5 per cent in 2014 to 2.1 per cent in 2015, whilst participants in the latest Property Council of Australia Property Industry Confidence Survey are mildly upbeat about near-term prospects for capital values and levels of development activity.

Despite seeing the current market as modestly oversupplied, meanwhile, participants in the latest NAB Quarterly Australian Commercial Property Survey expect vacancies in the sector to drop back in coming years. A slight majority of shopping centre owners also expect some growth in turnover in the year ahead, according to a recent Jones Laing LaSalle survey.

Driving this is a number of factors. After several years of subdued conditions, retail sales rose by more than five per cent year on year in the year to October.

Entry of foreign fashion brands such as H&M, Forever 21, Uniqlo and Furla is driving competition for space in prime CBD locations. Retail landlords are increasingly replacing internet exposed tradable goods tenants such as book stores and music retailers with growing service-based clients such as beauty clinics and personal care as well as food service outlets. Perhaps just as important, outside of large format retail – where places like Bunnings and Masters are pursuing aggressive expansion – the pipeline of supply is not huge.

Still, there are headwinds. While cafés and food service outlets are going gangbusters and ‘big box’ retailers are riding a boom in residential property transactions and new housing construction, department stores are still getting pummelled by online sales – a phenomenon which represents a structural shift in the market that will not go away even if the economy picks up.

Moreover, generally subdued expectations outside of housing and exports regarding employment and the overall economy do not bode overly well for consumer confidence or spending.

Because of this, any general recovery in the market is likely to be modest in scale at best.

State/Sector

Among states and sectors, key developments are likely to be as follows:

• Markets are generally expected to tighten in New South Wales and Queensland amid strengthening economic conditions in Sydney, Brisbane, the Gold Coast and the Sunshine Coast.
• Perhaps surprisingly, markets in Perth are expected to tighten further notwithstanding expectations of slowing population and economic growth there.
• Generally subdued economic conditions will see markets weaken in Victoria, South Australia and the Northern Territory.
• The best returns are expected in large format retail, while cafés and service outlets should do well. There is little sign of any upturn in department store trading conditions.
• The entry of overseas retailers will underpin reasonable levels of competition in the prime CBD areas of Sydney and Melbourne.