Leasing momentum slows despite retail trade proving resilient

• Melbourne recorded the highest yearly retail sales growth across all states in October 2022. The state recorded a 13.5% y-o-y growth but monthly growth decreased to -0.1%.
• The retail leasing market remained subdued as retailers faced lower profitability due to a minimum wage increase, interest rate hikes and supply chain disruptions. However, demand for service-based tenants, including medical centres, remains elevated. 

Uptick in supply over 4Q22

• Retail completions totalled 20,300 sqm over the quarter and consisted of two new neighbourhood centres reaching completion (Mernda Town Centre and Berwick Square).
• The supply pipeline is moderately high, with 66,200 sqm of retail space to enter the market in 2023.

Yields remain stable for most sub-sectors

• Rents over 4Q22 remained relatively stable for regional, sub-regional and large format retail (LFR) assets. Rental growth in neighbourhood assets recorded a 3% q-o-q increase fuelled by strong performance, while CBD rents remained under pressure, recording a -5% q-o-q decrease.
• Over the quarter, yields remained stable for the majority of sub-sectors. However, neighbourhood mid-point yields recorded a softening of 25 bps.

Outlook: Reduction in retail trade volumes

• High levels of inflation and the increased cost of debt are likely to come into full effect and dampen consumer sentiment in 2023, as mortgage rates adjust accordingly. 
• Although yields have shown minimal increase, price equilibrium is expected to be achieved between vendors and buyers in the medium term.