Australian retail now much more compelling for investors: Dexus Research

Yields on regional shopping centres are now at 5.8%.

On various metrics the investment case for Australian shopping centres is improving. In a report, Dexus Research said vacancies have fallen significantly since the pandemic across the main enclosed shopping centre types. 

City retail vacancies remain high but have plateaued. The return of international tourism has helped drive foot traffic in CBDs which is now approaching pre-pandemic levels. 

Here’s more from Dexus Research:

Additionally, the rapid return of foot traffic to shopping centres emphasises the enduring role of physical stores, for the execution of omnichannel strategies with shopping centres acting as both a community hub and a convenient place to shop. 

The income growth story looks positive given retail turnover growth is leveraged to population growth, which is currently surging due to migration levels almost double the past average. At the same time, construction cost pressures are limiting the supply of new shopping centre space with additions of regional and subregional space in 2024 estimated at less than 10% of the average for the past decade. This growing imbalance between demand and supply augers well for vacancies to decline and rents to grow. 

The retail sector is looking much more compelling on a relative value basis. Over the past three years yields on large regional shopping centres have lifted by 80 basis points to an average of 5.8% making them more attractive relative to the office and industrial sectors. 

It appears investors are waking up to the positive story. Over the past year, the discount to net tangible assets for listed retail REITs in Australia has narrowed from 20%-30% to 0%-10% indicating greater confidence in the future stability of these asset values over office and diversified AREITs.