Battle-Fit Retail Sector Braces as Sales Slow, Downturn Looms

Australia’s pandemic-era “revenge spending” boom was sweet but the hangover from the retail sugar hit is coming as the dark clouds of an economic downturn gather.

Although the throbbing come down is imminent, however, from a retail property perspective the wheels are not expected to fall off the shopping trolley.

According to property economics specialist and Location IQ director Gavin Duane, the retail sector is battle fit for the challenges that lay ahead.

“The real issue is the ability of your retailers to pay rent,” he said. “And if they’re not getting sales growth, how do you get increases in rents over time?

“My view is that these retailers have gone through Covid and undertaken a lot of cost cutting around rents, a lot of leasing spreads have been negative over that period of time, and therefore they’ve also reduced their store networks.

“So the hope from my point of view is that they’re in much better shape post-Covid than they were pre-Covid to deal with this downturn, which was inevitably going to come at some stage.”

Duane will be among presenters The Urban Developer Retail Property vSummit on Thursday, 22 June, when he will detail the state of the sector and drill down into the challenges it is facing.

“Retail has been pumping since Covid and up until recently we’ve still had very strong sales growth,” he said. “Sales to March this year had been growing 7 per cent year-on-year whereas the long-term average is about 5 per cent.

“But what we’re starting to see now are those headwinds from inflation and interest rate increases starting to impact on what the growth will be going forward. 

“We’ve seen a lot of those larger format retailers, those with bigger [exposure to] discretionary spending, they’ve certainly experienced sales decline since the start of the year and we suspect apparel and other categories are going to start reporting a slowdown in sales.

▲ Strong post-Covid sales growth is slowing in the retail sector but it is battle fit to face the challenges ahead.

“So the big picture is that it has been very strong, but it’s slowing and where we go from here is really the piece we’ll be concentrating on.”

Duane said the fact that few retail development were coming online due to the impact of escalating construction costs would further help the sector buffer the impending downturn.

“For the time being, there are no major projects proposed in the retail industry … generally speaking there’s not a level of activity of new builds occurring because it just doesn't stack up at the moment.

“For existing owners of property that means you haven’t got a lot of competition coming because no one’s been building.

“And the last thing you need in a retail environment if you’ve got a slowdown is also a hit from competitive facilities.

“So the existing space should be able to hold up reasonably well in that environment … and retail is always a good investment so long as we don’t overbuild.”

The Urban Developer Rental Property vSummit will take place on Thursday, June 22. 

Click here to register and learn more.