Australia Retail Marketview Q1 2019: Shift in spend a sign of the times

Retail trade for the 12 months to February 2019 grew by 2.9% (3mma), up from the 2.5% recorded in the previous corresponding period. The ACT (4.6%), Victoria (4.4%) and Queensland (3.3%) performed strongly, whilst NSW (2.3%), SA (1.4%) and WA (1.4%) recorded moderate growth.

HOUSING MARKET TAKING ITS TOLL

The impact of the housing market has followed through to negative retail performance and dwelling approvals. Household goods trade declined 0.5% (3mma) y-o-y to February, the weakest performance since December 2012 and second consecutive month of negative growth, driven by furniture, floor coverings and housewares (-1.9%) and electronic goods (-2.1%). Hardware and garden supplies grew 2.4%. Dwelling approvals were 12.5% lower over the same period.

FURTHER RENTAL GROWTH UNLIKELY

The moderating market has not yet translated into rental declines but landlords are feeling pressure to add value and generate revenue from alternative lifestyle tenants. Pressure on household savings and the wealth effect is impacting turnover of furniture and bedding tenants in lower socio-demographic areas whilst other areas remain buoyant. As housing affordability improves, however, household goods sales should recover. 

YIELDS FLAT AND INVESTMENT ACTIVITY SLUGGISH 

Yields across all cities remained flat over the quarter, with no further compression expected in this cycle. National investment volumes in Q1 2019 were up on the same period a year previous but still below the long-term average, totalling $178 million through just four sales. The majority of this was the settlement of Crossroads Homemaker Centre (NSW) from AMP Capital Investors to Ashe Morgan for $140m on a 6.5% yield.

STRUCTURAL CHANGES REACH BIG BOX

Structural changes have reached the historically ‘no frills’ big-box market as customer experience becomes key to increasing centre dwell times and landlords increase their share of food, health and wellbeing tenants. Sales captured by online retail in addition to large volumes of supply, including converted Masters sheds, will continue to put pressure on rental growth. Almost 100% of supply brought to market in Q1 2019 were Masters conversions. 

Retail sales grew by 2.9% y-o-y (3mma) in the year to February 2019.

National retail rents experienced slight softening in Q1. With tenants becoming more cautious and letting up periods increasing, incentives are likely to trend up throughout 2019.

In February, consumer confidence rose to 103.8 from 99.6 in January.
Investment activity in Q1 2019 totalled $623m, down 50% on the $1.27b recorded in Q1 2018. Investment volumes are likely to rise significantly as investors look to reweight portfolios.
Across the board yields remained stable in Q1. Yields have bottomed and are likely.