APPD Market Report Article

Melbourne

August 26, 2022

Andrew Quillfeldt, Senior Director - Research, Australia

-1.5%

AUD 1,498

Decline
Slowing

Retail trade, partly driven by higher inflation, remains strong

  • Victoria recorded q-o-q total retail trade growth of 3.5% in May 2022, down from 6.0% in February 2021. The slowing in spending growth reflected the higher interest rate environment, which have increased cost of living pressures for consumers.
  • Retail leasing activity, primarily driven by national brands, was subdued. This was due to inflation and ongoing supply chain concerns impacting the outlook for retail spending and business costs. Labour shortages have also contributed to the weak leasing environment.

Supply pipeline remains low due to market uncertainty

  • Two developments were delivered in 2Q22. One being the Armada Dandenong Plaza refurbishment works, and the other being the Botanic Ridge neighbourhood centre, which delivered 3,800 sqm of new retail space.
  • The remaining supply pipeline for 2022 is low, with only two more projects expected to be completed in the second half of the year. These two projects are expected to deliver a total of 24,000 sqm of new retail floor space.

Melbourne retail yields remain stable in 2Q22

  • The average yield was unchanged across all subsectors except for neighbourhood centres, which recorded a softening of 12 basis points.
  • Gross rents recorded no real significant movements in the quarter.

Outlook: Rising interest rates are likely to lower investor demand

  • Higher inflation and labour shortages for the short-to-medium term will likely result in a weaker leasing demand environment as businesses refrain from expanding or opening stores. This is expected to result in higher vacancy rates across the market.
  • Continuous supply chain disruptions caused by the ongoing pandemic and current geopolitical tension are expected to keep inflation elevated for the rest of 2022. Investor confidence is likely to be more subdued in the near term as interest rates rise.

Note: Melbourne Retail refers to Melbourne's overall retail market.

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