Retail rental growth is picking up in Sydney and Melbourne while it remains sluggish, and even falling, in other cities.
While rents in the two largest cities rose 0.8 per cent in the year to June, they gained just 0.3 per cent in Brisbane, were flat in Perth and fell 0.2 per cent in Adelaide, JLL's latest quarterly Retail Research report shows.
Stronger local economies and population growth underpinned second-quarter growth in the NSW and Victorian capitals, capping a two-year period in which higher levels of retail spending have failed to boost rents or cut vacancy rates.
The average national vacancy rate, in fact, picked up to 4.2 per cent from 3.9 per cent in December 2015, while the biggest rise in vacancy came in the CBDs, where it rose to 7 per cent from 6.3 per cent.
Faced with ongoing challenges such as growth of international fast fashion retailers and online retail, conditions are likely to get worse for retailers before they get better.
"Market conditions are likely to soften slightly in the next few months as the effect of retailer discounting impacts margins," said JLL's Australian head of retail, property & asset management Tony Doherty.
Separate news on Wednesday that headline inflation unexpectedly slowed to the weakest pace in 17 years in the June quarter also bodes poorly for rental growth prospects, as many rent contracts are linked to CPI inflation growth.
Woolworths' decision to close 27 supermarkets after a strategic review could be negative for REITs in the longer term, Macquarie analysts said. It could cause the deferral or postponement of other projects, further weakening a completions pipeline already 24 per cent under its four-year average, JLL's associate director of retail research Andrew Quillfeldt said.
Longer term, this would be positive, however.
"Existing centres will become more productive as the population continues to grow – particularly in Melbourne, which has the highest level of population growth nationally," Mr Quillfeldt said.
