22/11/2022

CYCLICAL VS ESSENTIAL IN QUEENSLAND RETAIL MARKET

Despite ongoing pressure on household budgets, Queensland’s Retail trade has remained remarkably strong throughout the year, recording its 9th straight month of growth. Queensland’s seasonally adjusted retail turnover has increased by 9.7% over the past 12 months.

Australian hospitality businesses are set to benefit the most from the imminent Christmas spending spree, with trade volumes forecast to increase by 16.3% to $9 billion.

Regardless of the strength in our recent retail trade data, it is our view that the impact of continued pressure on household budgets is understated, and therefore retail sales volumes will weaken significantly post-christmas.

The Household Savings Ratio, which measures Household Savings against disposable income, is falling rapidly. Household Income is expected to remain steady but as the cost of living increases, the ratio will fall further as household access their savings to pay for the essentials, leaving less and less in the budget for the finer things.

This is reflected in Westpac’s November Consumer Sentiment Survey, which shows sentiment has fallen 6.9% over the past month and is now below the low-point of the GFC. The drop in confidence can be attributed to the threat of sky-high energy prices and a stubborn inflation figure which continues to defy the RBA’s strategy. As interest rates, fuel prices and residential rental rates continue to rise, it is our discretionary spending (i.e. Luxury Retail, Fine Dining, Entertainment) that suffers eventually. Non-cyclical industries (i.e. Grocery, Fuel, and Alcohol) will remain in high demand.

Hence, Retail assets are not exempt from the overarching “flight to quality” thematic that we are seeing play out in the wider market. As discretionary spending is impacted more and more by the cost of living, interest will gravitate towards essential retail offerings with strong anchors. We are seeing investors and developers flock to assets or development opportunities anchored by Quick Service Restaurants (QSR’s), grocery and fuel as they are seen as essential, regardless of the strength of the economy or what stage of the interest rate cycle we are in. This is happening despite there being higher rental income on offer for lower quality covenants, with landlords who opt for higher quality covenants and lower income being rewarded with a much sharper capitalisation rate on valuation.

In summary, the forced savings created by lockdowns, as well as the financial aid provided by the government throughout the pandemic, is largely responsible for pushing sentiment and inflation into unreasonably high territory, the effects of which have only been exacerbated by Covid-related supply chain issues and conflict-affected energy prices. In response, the measures Central Banks have put in place to contain inflation continues to apply pressure on household budgets, which is resulting in consumers losing confidence and withdrawing from non-essential spending.

​​​​​​​ Lower household disposable income with the risk of ongoing energy, supply chain and labour market issues, means you should be selective with the retail assets in your portfolio and ensure you are well positioned to meet the demands of a changing market. There’s a storm brewing!