The competition from online retail is real. Online retail sales have been growing over the past ten years, and while it has come back from the highs during COVID-19, it still remains an active segment of the market which is highlighted by the increased needs in industrial logistics and storage accommodation. This increase is most sizable in the non-food segments which is echoed by the reduced footprint of clothing and soft goods, and department stores across brick and mortar retail premises. Over the last year, non-food online retailing accounts for 16.5 per cent of all retail sales while food represents just 5.6 per cent after peaking at 7.4 per cent during the pandemic.
With a total 10.3 per cent of all retail sales being online, and this low food segment (which is our largest retail consumable), the ongoing need for brick and mortar retailers, particularly in the food sector, will ensure the continued need for shopping centres anchored by supermarkets. So shopping centres are not dead, however, the tenant types which occupy brick and mortar retail are certainly changing, with a greater weighting to food and service type industries.
During 2022, there were over $14.56 billion in retail assets which transacted across Australia, highlighting a strong confidence in this asset class by a range of private and institutional investors. Convenience and neighbourhood assets remain in high demand given this attraction to food, often anchored by a supermarket and home to supplementary specialty food retailers. Returns data from MSCI also suggests that sub-regional and neighbourhood centres have outperformed across both capital and income returns over the last year compared to larger major and super regional centres. Across the country, total returns for retail have averaged 6.8 per cent in 2022 ahead of office assets, due to consistent income returns despite limited capital appreciation.
While traditional food retailing continues to grow its share of retail trade, so too have cafes, restaurants and take away food services. However, this more discretionary food sector is expected to be hit due to the changing household balance sheet, given the increased interest rate environment. Another burgeoning discretionary sector has been that of luxury goods. There has been a strong uptick in luxury brands growing their retail footprint in Australia in major CBDs, growing suburban communities and tourism destinations. Anticipated robust tourism levels and the attractive Australian dollar for overseas visitors is likely to spur on this segment during a time where domestic discretionary spending levels out.
There is an expectation that pressure on yields will continue throughout 2023; high street retail yield movements are likely to be in response to the lease covenant, quality and location. With increased land tax attracted to many commercial assets this year, this is another pressure point for owners which may see greater distressed assets come to market which may also impact these rates. MSCI data highlights neighbourhood centres with their strong relationship with food are yet to show any yield growth remaining stable at 5.4%, whereas larger assets have shown early signs of growth in capitalisation rates.
Therefore with the continued increase in interest rates the likelihood of further yields increases are high across all retail types. However those assets with leases tied to turnover (particularly food retailers) and rental increases aligned with CPI will still enjoy strong income returns and may sacrifice short term capital gains keeping yields reasonably competitive. As buyers continue to look towards these assets and our shopping trends still see us visiting these centres and stores, retail is far from dead but our expectations and experiences will continue to evolve.
