Investment Leaders October 2025 Revenge Shopping

Shoppers unshackled. After several challenging years, households are gradually returning to retail spending, unshackled by lower interest rates and lower mortgage repayments. The uncertain global outlook is not hitting local sentiment in the same way, as we are seeing abroad.

A different shopping basket. The returning shopper looks very different in 2025. After a lockdown, there is a clear reset in priorities. There is a sense of revenge shopping, to make up for lost time, as spending skew towards dining out, travel and personal services.

Finding a new equilibrium. Meanwhile, the big structural headwinds for the retail sector are gradually subsiding. Households are not rushing to online portals with the same fervor, as in-store sales recover and more people find a new balance to their shopping habits.

Remixing tenants. In the face of changing consumer behaviour and online shopping, retail landlords are adapting accordingly. There is an urgent push to remix tenancies within shopping malls, incrementally shifting towards dining, personal services and experiential offerings.

A shopping mall comeback. Certainly, the retail sector has seen a long correction since 2018, more so in regional and sub-regional malls, and less so in resilient large format centres. In 2025, there is a broader recovery taking hold, driving higher rents and firmer yields.

Retail outperformance. For now, retail shopping centres are outperforming office and industrial, given its relatively greater sensitivity to lower interest rates. The gap between equity and credit returns is narrowing, with lower cash rates being the key catalyst.

Shoppers unshackled

Since 2018, the world of retail has had a wildly interesting ride, for shoppers, stores, landlords and investors alike.

A global pandemic triggered dramatic swings in retail spending both here and abroad, which started with the initial lockdown and stay-at- home mandates and followed by the reopening bounce and the cautious return of tourists and shoppers.

Through this unprecedented disruption, we have seen accelerated structural change, most notably with the shift from in-store to online shopping. More goods are being bought via e-commerce portals and more services – medical & educational – are being delivered virtually.

To top it all off, we had to contend with a cost-of-living shock, as higher inflation prompted aggressive interest rate increases from 2022. Higher prices and higher debt repayments have stymied the recovery in household spending, to the detriment of the struggling retail sector.

In 2025, there are more positive signs for the retail spending outlook, raising the hopes of potential investors after several challenging years.

Sustained population growth has increased the size of the retail market, even as inflation eroded individual spending power and living standards. While migration flows are gradually moderating from their cyclical highs, there is still strong fundamental demand growth.

Most significantly, lower interest rates are markedly easing the household mortgage servicing burden. With the rate cuts to date (and more still expected), the improvement in disposable incomes is set to be a key driver of increased consumer spending in 2025 and 2026.

Altogether, the retail sector outlook is looking a little brighter than what we have seen in recent years, supported by sustained demand growth, rising incomes and lower mortgage repayments.

Retail remixed

Through a very disruptive retail cycle, there have been some interesting trends – including some big compositional shifts – unfolding within each shopping basket.

As an aggregate headline, the size of the spend for Australian households is growing considerably (+7.9% p.a. over 5 years to mid- 2025), partly due to inflating prices (+2.8% p.a.), but mostly with increased spending volume (+5.1% p.a.). 

Meanwhile, the pattern of spending has shifted substantially as well. During the lockdown, there was markedly more spending on clothing, furniture, take-outs and alcohol, but that changed decisively with the subsequent reopening, towards more groceries and leisure travel.

Clearly, our collective experience over recent years has clearly reset our spending priorities, with an increased focus on personal care, along with holiday and leisure, along with a diminished focus on nesting at home.

At the same time, the cost-of-living crisis – arising from higher grocery bills and higher interest rates – has constrained many household budgets, bringing a focus towards non-discretionary or essential items, but not always at the expense of big-ticket discretionary goods and services (especially holiday travel).

In this context, there are big implications for retail landlords associated with this structural shift in spending patterns. Consequently, shopping centre landlords needed to adapt quickly, by changing their tenancy mix and retail offerings.

Over time, we are seeing a notable move from goods to services. Indeed, there is an increased focus on personal, leisure, health and medical services, rather than goods available online. Moreover, there is a tangible shift towards experiential offerings – combining shopping and entertainment – to draw customers out of their nests.

Back to the mall

From a retail landlord perspective, the sustained shift from in-store to online shopping have impacted on sales flow, which diminished tenant appetite for shopping centre space and created deep challenges to maintain occupancy and rental incomes.

Not surprisingly, there has been a short and sharp rental adjustment from 2018 up to 2022, initially with the threat of online shopping, markedly accelerated by the shutdown, and most recently with higher interest rates. Indeed, rents in regional malls (-9% peak to trough), sub-regional malls (-7%) and neighbourhood centres (-1%) all declined to varying degrees, notably with no rental falls in large format centres.

To be clear, the subsequent rental recovery has been relatively muted. Regional malls (+2% from trough) and sub-regional malls (+4%) are still tracking below their previous highs. The neighbourhood rental uplift is comparable (+4%). Large format centres remain the standout for retail, given rental gains that were sustained remarkably through a pandemic and the subsequent reopening (+8%).

From a retail investor perspective, these difficult trading conditions have diminished investor appetite for shopping centres for several years and drove long-running corrections in asset values and cap rates.

Between 2018 and 2024, there were substantial declines in shopping centre valuations. The price falls were deeper for regional malls (-29% from peak to trough) and subregional malls (-15%) and more muted for neighbourhood centres (-4%). Meanwhile, large format centres continued to gain favour with investors, with sustained price gains.

Similarly, we have seen broad-based softening in retail cap rates, as part of this long-running recalibration of retail asset pricing, before their eventual cyclical turning points in 2025.

Altogether, there are more consistent signs of recovery across retail sectors emerging in 2025, as the structural headwinds for retail diminish and lower rates stimulate consumer spending and investor appetite.

Retail outperformance

From an investment performance perspective, a cyclical upswing in returns is taking hold. There are multiple aspects to this recovery.

For the asset class overall, there are encouraging improvements in real estate performance. While equity returns are still tracking below credit returns, that performance gap is gradually closing. The prime driver of this broader upswing in returns relates to lower funding costs.

For the retail sector, there is clear outperformance in 2025, compared to both the office sector (where tenant demand is slower to recover) and the logistics sector (where more supply is starting to arrive). A key driver behind this relates to a greater retail sensitivity to lower rates.

Within the retail segments, there are some interesting trends unfolding. Sub-regional centres are leading this recovery, partly because of the upgrade potential, especially in a market where planning constraints are tight and new mall sites are hard to secure.

All this makes for a remarkable change of fortune for the retail sector, especially given the long-running correction that came before.

Retail spending fundamentals are looking better. As a headline, lower mortgage rates are injecting more money into household budgets, and they are inclined to spend it. That said, the pattern of spending is evolving again, as priorities shift towards leisure and travel, notwithstanding cost-of-living pressures and inflated prices.

Landlords are adapting to this new mall-goer. There is a notable shift from goods towards services and experiences. The adjustment from in-store to online spending is moderating, as households find their new equilibrium. With these shifts, rents and asset values are recovering.

Investor appetites are returning. As equity returns move from negative to positive, there will more investors drawn back into retail, especially given its current trend of outperformance ahead of the office and industrial sectors.