Retail assets shine for investors as transactions hit $3.6bn

According to Knight Frank’s latest Australian Retail Review, the sector delivered the strongest return of all commercial property markets last year, with annual returns of 9.2 per cent.

It came after household spending and consumption accelerated, driving stronger tenant sales, increasing re-leasing spreads and an improvement in retailer profitability.

As a result, investor sales surged, pushing total retail transaction volumes to $14.4 billion in 2025, up 43 per cent year-on-year.

Knight Frank senior economist, research and consulting, Alistair Read, said retail had been the clear standout property performer in 2025, with improved household spending, limited new supply and stronger leasing fundamentals driving renewed investor confidence.

In early 2026, the momentum in activity continued, with around $3.6 billion of retail transactions recorded in Q1.

In February, household spending rose 4.6 per cent year-on-year, demonstrating improving real incomes, easing inflation through 2025, and more flexible household budgets.

As a result, tenant performance lifted, with average Earnings Before Interest and Taxes (EBIT) margins across major retailers rising to 8.9 per cent in H1 2026, the strongest level in years.

Re-leasing outcomes were also supported by improved trading conditions, with average retail leasing spreads rising 4.2 per cent in 2025, helping to lift returns and underpin capital values.

Read said that stronger consumer spending had been critical in restoring momentum to the retail sector.

“Retailers have generally been better able to absorb costs, rebuild margins and support sustainable rental outcomes, particularly in higher-quality centres,” he said.

Middle East conflict and interest rates to pose a challenge

Despite the sector’s sustained success, the report cautioned that the conflict in the Middle East could pose a major downside risk to household consumption for the rest of this year.

Read said higher fuel prices, flow-on cost pressures across supply chains, and recent rate rises had squeezed household budgets, with early consumer sentiment data showing confidence was already softening.

“While household balance sheets remain generally resilient, heightened uncertainty over future costs is likely to weigh on spending – particularly in discretionary categories – in the months ahead,” he said.

Read added that tenant performance was also expected to be affected by higher costs and lower consumer demand, with pressure on retailer margins likely to impact income growth for investors.

“While retail investment enjoyed its strongest start to a year in a decade, with nearly $3 billion transacted by the end of February, activity stalled in March, as investors took a pause amid elevated uncertainty,” he said.

However, Knight Frank said medium-term retail fundamentals will remain positive, with a tight development pipeline, elevated construction costs and limited feasibility for new supply supporting space scarcity and rental growth prospects.

Despite rising interest rates delivering further yield compression, the firm suggested that improving income growth will sustain buyer appetite and enable tighter yields over the medium term.

According to the report, five key themes will likely define retail performance in the coming year:

Interest rate hikes may keep yields steady

Knight Frank said rising borrowing costs were set to pause yield compression, although yields were forecast to remain generally stable.

Early signs of margin pressure on tenants

The firm said higher operating costs and softer consumer confidence would prompt more defensive leasing strategies.

Prime centres continue to outperform

According to the report, rental growth in prime assets has been supported by stronger sales, higher foot traffic and resilient demand.

Rising requirement for logistics integration

With the convergence of online and physical retail, centres will be under continued pressure to deliver efficient, tenant-agnostic click-and-collect solutions.

Underspending on CapEx (Capital Expenditure) to create risks

The firm said the deliberate delay in spending to upgrade assets has emerged as a risk to asset performance and future valuations.

Read said, ultimately, the data reflected that retail had transitioned to a period of certainty, from a previous position of strength.

“Supply-side constraints, population growth and improving income fundamentals remain powerful structural supports for the sector,” he concluded.

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