Institutional capital returns to retail real estate after hiatus

Institutional capital is re-engaging in the retail real estate market, reflecting renewed conviction in the sector's outlook, according to a GPT Group report.

The real estate manager, which has $34 billion in assets under management, argued that the retail investment proposition is underpinned by a relatively stable and conducive economic environment, marked by strong population growth, stabilising inflation, and expected monetary policy easing through the year.

The report noted Australia has the highest forecast population growth of any mature economy, with an expected increase of 7.3% over five years. That compares to just 0.9% growth in retail stock over the same period, a gap that's expected to fuel retail sales per square metre to rise by 3.3% per annum by 2030, up from 2.5% over the decade to 2024.

Household finances are also expected to improve because of inflation falling to 2.4% in December 2024, down from a peak of 7.8% two years earlier. The continued flow-through of income tax cuts, positive real wage growth of 0.9% per annum, and potential cuts to the official cash rate, the likelihood of which has increased due to global economic risks linked to US President Donald Trump's tariff measures, are also expected to bolster the household savings rate.

In turn, the decline in inflation and lower short-term interest rates are predicted to lift disposable income, positively impacting retail spending capacity.

Australian shopping centres also benefit from "structural market advantages," including "limited supply" due to high replacement costs, "favourable category exposure" with supermarkets as anchor tenants driving consistent foot traffic, and "land optionality" that allows for future mixed-use development on land-rich sites.

The report said the sector is "passing the inflection point" as market conditions improve, citing low vacancy rates, strong sales, and more attractive valuations. Also, retailers' capacity for rental growth has improved, signalling a "solid foundation for investment."

The report added with risks now priced in, there's a clearer path for income-led returns, making retail a more attractive asset class for investors.

Globally, appetite for retail real estate "remains strong." The top 20 buyers, led by Blackstone, Realty Income, and China Life, CIC China, and Kimco, invested US$32 billion in retail properties in 2024. Meanwhile, the retail share of transaction volumes in the US has returned to 2017 levels, which the report said signals a broad recovery in the asset class.

"2025 is forecast to be a year of economic recovery, and the retail sector is on track to deliver attractive risk-adjusted returns. Managers are unlocking embedded value in shopping centres and outperforming valuation assumptions," the report said.

"Tight market conditions, competition for space in the right locations, low supply, high yields and sustainable income growth will put retail at the top of investors shopping lists."