LJH Commercial

Your Australian retail market performance insights 2022 MARKET MONITOR RE TA I L

CONT ENTS Retail conditions improve but challenges remain 1 Demographic overview & outlook 2 Sector trends 4 • Online shopping in a post-covid world 4 • The impact of inflation and wages growth on retail 5 • What does movement in the housing market mean for retail trade? 7 Supply & vacancy trends 8 Rent & incentive update 9 Legislative update 10 Infrastructure update 11 Investment market update 12 What’s ahead for retail? 13

1 Retail Market Monitor | 2022 After battling extremely testing operating conditions, as a result of the Covid-19 lockdowns and government restrictions, over 2020 and 2021 the latest challenges faced by the retail sector come from the economic environment. The good news is that key metrics of retail performance - releasing spreads, vacancy rates and portfolio valuations - from some of Australia’s major shopping centre owners all improved over 2021. The battle ahead lies in the form of softening consumer confidence as inflation and monetary policy tightening take hold in Australia. In addition, softer housing market conditions due to rising interest rates rise is expected to impact on the ‘wealth effect’ which will change the way consumers spend money in the year(s) ahead. Resilience is a word that has been thrown about a lot over the past two years, however, it is undeniable that the experience of Covid-19 has encouraged most owners of retail space to think laterally when it comes to their assets. This includes not presuming the world will operate in a ‘business as usual’ fashion forever, and most importantly, responding to consumer trends quickly. This will hold many retail property owners in good stead as we work through a tricky period for consumers. In this latest edition of our Retail Market Monitor we delve into these latest trends and provide an outlook for the Australian retail market and where opportunities for growth might lie. Retail conditions improve but challenges remain Mathew Tiller Head of Research

2 Demographic overview & outlook Population and demographic trends play an important role in shaping retail performance. They impact how much households spend, as well as what people are consuming. In addition, these movements also factor into retail employment, wages and business profitably. Population growth in Australia is still remains well below pre-covid levels. Australia’s population only increased by 68,900 over the year to September 2021, equating to a growth rate of just 0.3 per cent. With all the growth being attributed to natural increase (births), as net overseas migration is still negative. Over the year to September 2021, the natural increase in population was 136,200, and net overseas migration was -67,300. Victoria experienced a decrease in the population, declining by 32,700 people (-0.5 per cent) over the 12-months period. The Northern Territory and ACT also recorded very slight population decreases, while all other states saw their populations increase. Queensland was the standout with the population increasing by 57,800 people, or 1.1 per cent. Source: ABS Population by state and territory Population (Sep 2021) Annual change (persons) Annual change (%) NSW 8,186,800 24,200 0.3% VIC 6,643,100 -32,700 -0.5% QLD 5,240,500 57,800 1.1% SA 1,772,800 2,600 0.1% WA 2,685,200 17,800 0.7% TAS 540,800 200 0.0% NT 245,900 -600 -0.2% ACT 430,500 -300 -0.1% Australia 25,750,200 68,900 0.3% The decline in overseas migration is being felt most acutely through the change in the number of temporary visa holders. In total, the number of temporary visa holders in Australia are an extraordinary 95 per cent below the level they were at pre-Covid. The biggest losses have been felt in the student and working holiday maker categories. A huge number of student visa holders previously resided in Melbourne, hence why this city has been most impacted. The areas of the country that recorded the largest declines in population are all centred around universities in Melbourne. These were Melbourne city (population decline of 11per cent), Clayton (population decline of 9.4per cent) and Carlton (pop decline of 10per cent). These areas typically house large numbers of students that attend RMIT, Melbourne and Monash Universities. Retail Market Monitor | 2022

3 The loss of student and working holiday makers is being felt by employers in the hospitality sector in particular, with most reporting significant worker shortages. This phenomenon is being felt all around the country, and was compounded in NSW and QLD by the serious flooding over summer, which deterred the few working holiday makers in the country from travelling and working there. One issue Australia will have to grapple with, is how to convince these visa holders to come back. Anecdotally, we are already seeing a return of overseas students to universities, although not in the numbers we saw prior to Covid. Working holiday makers remain far below pre-Covid levels though. The high cost of airfares, soaring inflation (particularly in the UK), strong jobs markets globally, and soaring rents in Australia are all Source: Department of Home Affairs, The Grattan Institute Source: ABS Change in temporary visa holders since Sept 2019 contributing issues in attracting temporary workers and backpackers to Australia. This means we are likely to see retailers and the hospitality sector continue to struggle to fill jobs, as they are limited to competing for mostly domestic workers. Regional areas of NSW and Victoria continued to attract migrants from their respective capital cities in larger numbers than the pre-Covid era. It is likely, however, that this trend will start to ease as more workers are expected to attend offices in CBD areas at least a few days a week, and regional house prices continue to increase. One of the attractions in living in regional areas of NSW and Victoria had been the relative affordability compared to housing in Sydney and Melbourne. However, in many of the more popular regional areas that are within a twohour drive from the cities, the affordability factor has decreased significantly. Intrastate migration - from capital city to rest of state -3,000 -2,000 -1,000 0 1,000 2,000 3,000 4,000 5,000 6,000 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 Mar-21 Intrastate migration - from capital city to rest of state NSW VIC QLD SA WA TAS NT -120% -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 New Zealand Other Temporary Student Temporary Skilled Working Holiday Grand Total Retail Market Monitor | 2022

4 Sector trends As expected, the growth in ecommerce slowed significantly in 2021 versus 2020 growth, as more consumers in Australia were able to return to in-person shopping. While, Hobbies & Recreational Goods and Home & Garden categories were the only two categories that recorded growth in excess of 2019 levels. Online shopping in a post-Covid world Over 2021, 19.3 per cent of all retail purchases were conducted online, and 81 per cent of all Australian households purchased something online. Spending on retail overall grew at a healthy rate of 4.3 per cent over 2021, but in the online category the growth was an extraordinary 23.4 per cent. The good news for owners of retail property is that ‘bricks and mortar’ continues to play a strong role in online shopping. According to Australia Post, the proportion of click and collect services in online shopping has grown to 13.6 per cent. In 2022, it is expected that inflation will have a big impact on shoppers habits, particularly given that the transport and warehousing sector has been hit hard, and delivery costs are now rising. Some retailers can no longer justify offering free postal services. Source: Australia Post: 2022 Inside Australian Online Shopping As an example, Zara have recently removed their free postal returns service, although still only charge a modest fee of $2.95. The reality is that online purchases do start to lose their appeal if the experience becomes more expensive than attending a store in person. One of the strongest growing sectors in ecommerce was the Marketplace sector. This sector recorded consistent, above average growth in the last two years. Expect to see more growth in this area, as shoppers look for bargains and to recycle and monetise unwanted items. 0% 10% 20% 30% 40% 50% 60% Variety Stores Fashion & Apparel Home & Garden Health & Beauty Media Hobbies & Recreational Goods Specialty Food & Liquor 2021 2020 2019 Annual change in ecommerce purchases 0% 10% 20% 30% 40% 50% 60% Var iety Stores Fashion& Apparel Home & Garden Health & Beauty Media Hobbies & Recreational Goods Specialty Food & Liquor 2021 2020 2019 Specialty Food & Li or Hobbies Recreational oods edia Health B auty Ho e & Garden Fashion & Ap arel Variety tores 0% 10% 20% 30% 40% 50% 60% Variety res Fashion & A arel Home & G r en Health & B uty ia Hobbies & Recr ational G ds Specialty Fo d & iquor 2021 20 2 Retail Market Monitor | 2022

5 The impact of inflation and wages growth on retail Inflation is at its highest level in Australia since the introduction of the GST in 2001, at 5.1 per cent over the year to March 2022. The biggest increase in prices were recorded in transport (13.7 per cent), housing (6.7 per cent) and furnishings, household equipment and services (4.9 per cent). Only clothing and footwear and communication recorded a decline in pricing over the year to March 2022, at -1.5 per cent and -0.8 per cent respectively. While retail sales increased by a very strong 9.1 per cent over the year to March 2022, rising inflation and interest rates will likely dampen this growth figure significantly, particularly in the nondiscretionary sector. Other than through the ‘shock’ period of Covid-19, Westpac has not recorded a lower consumer sentiment period in their index since 2011. Australians are coming to grips with rising prices in almost every consumer category, as well as rising interest rates. What’s more, income earners in their 20s will have never experienced a period of rising prices, so this environment will come as quite the shock. It is likely consumer sentiment will remain depressed while we work through the monetary policy tightening cycle. Wages growth will also be a key consideration when it comes to assessing the retail outlook in 2022. Unfortunately, the latest Wage Price Index data showed wages only grew 2.4 per cent over the year to March 2022, which is well below inflation. However, this is not necessarily a new trend. Westpac Consumer Sentiment Index Source: Westpac Melbourne Institute Consumer Sentiment Index 60 70 80 90 100 110 120 130 May-2010 Nov-2010 May-2011 Nov-2011 May-2012 Nov-2012 May-2013 Nov-2013 May-2014 Nov-2014 May-2015 Nov-2015 May-2016 Nov-2016 May-2017 Nov-2017 May-2018 Nov-2018 May-2019 Nov-2019 May-2020 Nov-2020 May-2021 Nov-2021 May-2022 Retail Market Monitor | 2022

6 Over the past 10 years many Australians have become wealthier due to asset price growth, most notably housing. That said, this phenomenon is not felt across the board – owners of housing in inner suburbs of Sydney and Melbourne will have benefitted to a far greater than owners in Perth, as an example. Not a lot of attention has been paid to disposable income growth as the housing market has flourished and unemployment has been low. The reality is that incomes have been virtually stagnant since 2009. From 2001 to 2009 (eight year time frame), median household incomes rose a healthy 31 per cent. Following the GFC, and over the next 10 years, incomes have risen by 1 per cent, a staggering statistic. A steady supply of foreign labour has contributed to this, as well as a very low inflationary environment. Obviously these two factors have completely changed. The upcoming minimum wage decision by the Fair Work Commission, due in mid-June, will be an interesting one to watch, and have a big impact on wages growth going forward, as this decision impacts the pay rises of about 2 million Australian workers and their families. Household annual disposable incomes Source: HILDA Statistical Report 2021, Melbourne Institute: Applied Economic and Social Research $60,000 $65,000 $70,000 $75,000 $80,000 $85,000 $90,000 $95,000 $100,000 $105,000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Mean Median Retail Market Monitor | 2022

7 Movement in house prices in Australia has typically been a good leading indicator of retail trade performance. On a six-month lag basis, retail turnover growth broadly follows the same pattern of house price growth. This is because Australian homeowners tend to feel wealthier when house prices are growing, even if they don’t have more cash in the bank. There was somewhat of a break in the trend over 2020/21 as Covid-19 played havoc with retail trade patterns, and we recorded wild changes in turnover growth. However, now that the ability for retailers to trade to has returned to normal conditions, the correlation should hold again. Coupled with rising interest rates and inflation, it is highly likely that the ‘wealth effect’ will work in reverse with even the smallest downwards movement in house prices, as this would mean both a paper loss of wealth, as well as less cash in the bank. What does movement in the housing market mean for retail trade? Source: ABS Residential house prices v retail trade 0% 2% 4% 6% 8% 10% 12% -10.0 -5.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 Sep-2004 Sep-2005 Sep-2006 Sep-2007 Sep-2008 Sep-2009 Sep-2010 Sep-2011 Sep-2012 Sep-2013 Sep-2014 Sep-2015 Sep-2016 Sep-2017 Sep-2018 Sep-2019 Sep-2020 Sep-2021 Residential prices Retail Trade (6 mth lag, RHS) Retail Market Monitor | 2022

8 Supply & vacancy trends The pipeline for new retail projects continues to be more subdued than compared to pre-Covid times. Larger institutional owners continue to focus on re-positioning existing assets, to ensure they future proof their largest, most valuable assets. New offerings are being included in the retail mix at some shopping centres. For instance, Scentre Group and their co-owners are investing $355 million in Westfield Knox including a new fresh food emporium and new Woolworths and ALDI supermarkets. Recognising the demographics of the area, the upgrade to the centre will also include a sport, athleisure and recreation precinct, including a 2,000sqm library, and a full sized outdoor basketball court. The court will be used by the local basketball association. This investment by Scentre Group is an example of the new era of service provision that many more shopping centres will start to provide, and builds upon the health and beauty services that most centres have included as part of their mix over the last 10 years. Ensuring that foot traffic is driven by more than just supermarkets and big box retailers is critical to the long term viability of shopping centres, and will also help fill spaces in centres typically occupied by specialty, department and discount department stores. Following on from the successful launch of their 1,800sqm flagship store in Sydney, Mecca will be opening their Melbourne concept store in the building previously occupied by David Jones menswear in Bourke St Mall. The store will be a whopping 3,000sqm and launch in 2023. These stores are all about experience, and ensuring the customer has a reason to visit the store by offering masterclasses and brand immersions. Demand for retail space improved over 2021, even with significant lockdowns in Sydney and Melbourne. After the shock of 2020, both retailers and owners are starting to become more comfortable with the operating environment, and very strong retail trade growth has also made many retailers cautiously optimistic about future growth plans. Vacancy in the portfolios of some of Australia’s major REITs all declined, with the exception of Mirvac, where the vacancy rate excluding CBD stores was 0.9 per cent. Those centres with a weighting towards services and nondiscretionary retail should continue to maintain healthy occupancy. The non-discretionary sector, however, is likely to find trading conditions in 2022 increasingly difficult, as shoppers see their disposable income eaten away by higher interest rates and inflation in essential items like food, housing, transportation and education. Retail occupancy in most suburban strip centres continues to improve, as more workers are likely to continue to work from home at least some of the time. In the CBDs, foot traffic is still down on precovid levels. There is early evidence of a trend in more ‘suburban’ style retailing coming into CBDs, with the Sydney CBD seeing it’s first Big W store open in March 2022. REIT 2020 2021 GPT 2.0% 0.9 % Vicinity 2.0 % 1.8 % Scentre 1.5 % 1.3 % Stockland 1.3 % 0.9 % Mirvac 1.6 % 2.4 % Retail occupancy - Year ending Retail occupancy - Australian REITs Retail Market Monitor | 2022

9 Rent & incentive update While occupancy levels continue to improve in most shopping centres and suburban retail strips, rental growth is still broadly negative, when we use average re-leasing spreads of the major REITs as a measure. The re-leasing spread is the difference between the previous rent, and the new rent that the existing tenant pays upon renewal of the lease. The better news for the major landlords is that while most reported negative re-leasing spreads, all recorded improvements on 2020 levels. Stockland, which has traditionally been more weighted to town centre type retailing, reported positive re-leasing spreads, and when including both new deals and renewals, leasing spreads of +1.2 per cent. The outlook for any rental growth will absolutely be impacted by the economic cycle we now find ourselves in. That is, one of rising prices and rising interest rates. In addition to these two cost increases, many retailers will have their wages bill increasing, as staff are hard to come by and higher wages may need to be paid in order to attract and keep staff. In this environment, landlords will need to proceed with caution when seeking more rent off their tenants, as margins will be squeezed tighter than ever, particularly for those retailers who can’t easily pass on cost increases. REIT 2020 2021 GPT -14.1% -8.5% Vicinity -12.6% -6.4% Scentre -13.1% -7.6% Stockland -7.8% 0.6% Mirvac -5.7% -0.9% Australian REIT re-leasing spreads Tenants in the non-discretionary sector – particularly food and beverage retailing – will feel this impact most acutely, as customers may begin to walk away if cost increases are passed on too readily. The CBDs continue to be a drag on rental growth across the country. Rents across all CBDs are still declining, as the return to pre-Covid foot traffic levels on a consistent basis across the week now appears unlikely. Incentives tend to move faster and more aggressively than rents in any given cycle. While not readily reported by many landlords, Stockland has reported their incentives reducing from an average of 14.2 months in 1H21, to an average of 11 months in 1H22. A reduction in incentives, even if face rental growth is still negative, indicates improving leasing conditions overall. Retail Market Monitor | 2022

10 Legislative update Retailer administrations will be an area to watch closely as we move away from the era of Covid support for the business community. In all sectors of the economy, administrations have remained low throughout Covid as banks, the ATO and other entities gave businesses some breathing space as they dealt with the implications of Covid on their business. Furthermore, financial assistance in the form of JobKeeper payments have likely allowed some underperforming businesses to trade longer than they otherwise would have. Now that this financial assistance and payment ‘holidays’ have been removed, it is likely some businesses will struggle to catch up to delayed payments, particularly as all their other costs and wages are increasing steadily. According to the CreditorWatch Business Risk Index (BRI) April 2022, the Food and Beverage sector has the highest Probability of Default of any sector in the country, at 7.1 per cent. This sector is followed by the Arts & Recreation services sector (4.8 per cent). Both of these sectors are large occupiers of retail space, particularly in CBDs, and landlords should be mindful that the financial situation of their tenants may have declined, ironically, as they have been able to open and operate normally. The conclusion of the federal election will be a relief for many, as we now have certainty of government for the next three years. Action on climate change will likely be swifter and more extensive under a Labor government and with a significant number of independents in the house, most of whom were elected under a banner of a commitment to action on climate change. Owners of property should be prepared for further movements in the sustainability area of the property sector, which may include some additional cost impacts. Retail Market Monitor | 2022

1 1 Infrastructure update The incoming Labor government have already made clear they intend to review all large scale infrastructure projects that had been committed to by the previous Coalition government. This includes the $14.5 billion Inland Rail project. Some of Labor’s other pre-election promises included setting up a High Speed Rail Authority and spending more money on public transport, including allocating $2.2 billion to the proposed suburban rail loop in Melbourne. Soaring construction costs and a massive budget deficit following emergency Covid expenditure is likely to dampen the outlook for any major infrastructure spending going forward. The RBA are currently pulling the levers available to them on a monetary policy side, in the form of increasing the cash rate target, and there will be an expectation on the part of the federal government to not further fan the flames of inflation on the fiscal policy side by overcommitting to spending. Retail Market Monitor | 2022

12 Investment market update The total value of retail investment sales reached record levels in 2021 with more than $14 billion worth of transactions taking place. This result was driven by the significant improvement in investment fundamentals, including the wealth effect (rising house prises), record renovation activity – which drives the performance of the LFR sector in particular, retail trade overall and floods of money being pumped into the economy through JobKeeper, and low interest rates. The retail sector also saw a number of new entrants come into market looking for counter cyclical opportunities, particularly syndicators. The world is still awash with cash looking for an investment home, and Australia’s relatively strong performance throughout Covid (both economic and health wise) as well as the attractive yield on offer, meant that offshore capital continues to search for assets in Australia. Total returns in the retail sector have improved vastly since this time last year, even as re-leasing spreads are still negative. According to the Australian All Property Index, Total Returns as at December 2021 are now firmly positive, at 6.30 per cent, a significant turnaround from December 2020 when they were well into negative territory. Income returns are helped along by built in rent reviews across leases, so are always more positive than releasing spreads. However, rising costs of operations may dampen the return outlook going forward, and the risk of increasing vacancy through retailer administrations remains elevated. This could have a negative impact on retail capitalisation rates, although this trend is at yet to play out. Retail Market Monitor | 2022

13 What’s ahead for retail? The outlook for the retail property sector investment market remains mixed, as many of the fundamentals working in the sector’s favour in 2021 are now deteriorating. While yields are still attractive relative to global retail asset pricing (Scentre Group reported a weighted average cap rate of 4.82 per cent as at December 2021), rising interest rates may knock out the marginal buyer, albeit at the cheaper end of the investment spectrum. Large institutions mostly still have low gearing, and interest rate hedging facilities that provide some cover against monetary policy tightening. Source: PCA, IPD Australian All Property Index Australian all property index, retail Dec - 20 Dec - 21 Total Return Income Return Capital Growth 10% 5% 0% -5% -10% -15% 6.3% 4.1% 5.1% 1.2% -10.1% -13.7% More likely to work against the sector is the uncertainty around the monetary policy tightening cycle. As long as Australia is seeing interest rates rise, the outlook for the retail sector will weaken. This is because house prices are likely to stagnate or decline, and real wages are now also falling, eating into the disposable income of Australian households faster than ever before. Still, many investors will still view retail investments as a counter cyclical opportunity, with CBD assets potentially viewed as repositioning plays. Retail Market Monitor | 2022

Connect with us ljhcommercial.com.au LJ Hooker Commercial does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the information, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and projections. LJ Hooker Commercial will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. © LJ Hooker Commercial 2022 More people, more places PARTNER WI TH AUSTRAL I A ’ S MOST I CON I C REAL ESTAT E BRAND LJ Hooker Commercial NSW Bankstown Ph: 02 9790 1111 Central Coast Ph: 02 4353 7700 Coffs Harbour Ph: 02 6651 6711 Forster Ph: 02 6591 6400 Macarthur Ph: 02 4620 6111 Newport Ph: 02 9979 1111 Penrith Ph: 02 4731 3399 Sydney City Fringe Ph: 02 8595 1899 Tamworth Ph: 02 6767 1710 Taree Ph: 02 6552 1133 Terrigal Ph: 02 4385 8444 Wollongong Ph: 02 4229 8600 LJ Hooker Commercial ACT Canberra Ph: 02 6248 7411 LJ Hooker Commercial NT Darwin Ph: 08 8924 0977 LJ Hooker Commercial QLD Brisbane Ph: 07 3115 7128 Broadbeach Ph: 07 5531 6688 Bundaberg Ph: 07 4131 8000 Burleigh Heads Ph: 07 5593 8377 Coolangatta | Tweed Ph: 07 5536 5577 Gold Coast Ph: 07 5592 0555 Mackay Ph: 07 4962 3535 Palm Beach Ph: 07 5534 4033 Solutions Ph: 07 5585 7888 Toowoomba Ph: 07 4688 2266 LJ Hooker Commercial SA Adelaide Ph: 08 8232 8844 LJ Hooker Commercial WA Perth Ph: 08 9220 2200 Connect with us ljhco ercial.co .au LJ Hooker Commercial does not give any warranty in relation to the accuracy of the information contained in this report. If you intend to rely upon the information contained herein, you must take note that the inf rmation, figures and projections have been provided by various sources and have not been verified by us. We have no belief one way or the other in relation to the accuracy of such information, figures and pr jections. LJ Hooker C mmercial will not be liable for any loss or damage resulting from any statement, figure, calculation or any other information that you rely upon that is contained in the material. © LJ Hooker Commercial 2022

RkJQdWJsaXNoZXIy MTI3ODI1