Investors are doubling down on retail property, with investment volumes climbing 12 per cent to $7.5 billion as annual returns hit 9.8 per cent.
New data has shown that Australia’s retail sector has persevered through a higher interest rate environment, with investment volumes reaching $7.5 billion in the first half of the year.
According to Knight Frank’s latest Australian Retail Review, the result was up 12 per cent compared with the same period in 2025.
In the calendar year to August, transaction activity was running close to 2022 levels and, if surpassed, would reach the highest in more than a decade.
Knight Frank senior economist, research and consulting, Alistair Read, said the data highlighted resilience in the sector despite higher borrowing costs and renewed inflationary pressures.
He said the retail market had continued its recovery that began in 2025, with consumer spending remaining more resilient than many expected.
"The combination of resilient consumer spending, limited new supply, and improving income growth has reinforced retail’s position as one of the most attractive commercial property sectors for investors,” he said.
Read said the investor appetite for retail was reflected in the sector’s annual returns of 9.8 per cent, underpinned by 5.9 per cent income growth and 3.7 per cent capital growth.
The findings came after the Reserve Bank recently increased the cash rate by 0.25 per cent to 4.60 per cent in the fourth rise this year.
Resilient consumer spending drives investment
According to the research, the positive result in the first half of the year came after consumer spending rose 6.8 per cent in the year to August
As a result, retailer performance was boosted, with data showing average Earnings Before Interest and Taxes (EBIT) margins across key major retailers increased to 8 per cent in the 2025–26 financial year.
“Major retailers have so far seen more resilience in consumer spending than expected despite increased headwinds through 2026,” Read said.
"That spending growth is flowing through to retailer performance, supporting stronger leasing outcomes, ongoing rental growth and improved income prospects for retail investors.”
Further, rental fundamentals have also remained supported, with vacancy rates falling to their lowest level in more than a decade, and yields remaining sound at 5.6 per cent.
Meanwhile, occupancy costs remained stable at 14.2 per cent, indicating most retailers were comfortably absorbing rent growth
Read said the dynamics will likely underpin stronger re-leasing growth over coming years as retailers compete for increasingly scarce space.
In addition, across 95 publicly listed retail assets, moving annual turnover growth averaged 3.4 per cent over the past year.
Prospective threats in 2027
Despite the positive findings, the report noted that renewed inflationary pressures, potential further interest rate rises and the broader market slowdown would be important to watch heading into 2027.
However, despite the risks, it said the retail sector's medium-term fundamentals remained supportive, particularly due to ongoing constraints on new retail development.
Read said that in a higher-for-longer interest rate environment, it was becoming increasingly evident that rental growth will be the key driver of performance.
"Retail is well positioned in that regard. Limited new supply, strong population growth, low vacancy and healthy tenant demand are creating a favourable environment for sustained income growth.”
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