Australian retail real estate: expectations vs. outcomes

Econometrics and economic theory are inherently imperfect, with exceptions to most rules. However, foundational economic theory is based on long-standing trends and historical observations where one variable impacts another. So, does economic theory hold up in the Australian retail real estate sector? Here, we explore the expected outcomes on annual retail transaction volume across three Australian macroeconomic variables, comparing them with the actual outcomes observed through empirical data. Specifically, we will examine the correlation between national retail transactions and three variables from 1988 to 2023.

Economic theory suggests that a rise in the cash rate would lead to a fall in retail transaction activity due to increased cost of capital for potential buyers and developers, alongside a rise in capitalisation rates.

We observed a correlation coefficient of -0.72 between the datasets, indicating a strong inverse relationship that aligns with economic intuition. For example, in 2021, when the cash rate was at its lowest level in our dataset, transaction volumes reached $13.2 billion – the highest level recorded, approximately 50% more than the next highest year.

Figure 1: Annual retail transactions and cash rate over time (1Q1988 – 4Q2023)

Source: JLL Research, RBA

Inbound migration to Australia has reached record levels post-COVID, but has this impacted retail transaction volumes? According to economic theory, positive demand pressures should lead to higher retail spending and more retail transactions as inbound migration increases. 

Although the data showed a positive correlation between net migration and sales volumes, which follows implied theory, it was only 0.19, indicating a weak correlation. Factors such as a lag between the two variables and external influences like e-commerce trends may contribute to this weak relationship.

Intuition suggests that as online retailing increases, a substitution effect would lead to a fall in demand for traditional retail spaces, resulting in fewer retail assets being transacted.

However, we observe a positive correlation coefficient of 0.49, which paints a conflicting view. Although counterintuitive, several reasons may explain this positive relationship. Firstly, online retail penetration is a ratio – so the answer lies in the absolute figures for online and in-store spending. In-store spending held up far better than expected and performed strongly, attracting capital back into the sector. We even observed elevated transactions during 2017 and 2018, when the fears of e-commerce were at their peak. Since 2021, the retail sector has demonstrated resilience and growth potential, indicating that e-commerce and physical retail can co-exist and thrive.

The 2025 outlook predicts a fall in the cash rate as inflation drops to more acceptable levels and inbound migration remains high by historical standards. Therefore, an increase in investment activity is anticipated. Fundamental and capital market factors support the retail investment proposition, and if history and statistics are any guide, we can look forward to another active year of transactions.

Figure 2: Correlation coefficients between all variables and national retail asset sales (1Q1988 – 4Q2023)

^{Source: JLL Research, NAB Online Sales Index}