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May 14, 2025

Convenience is king: The strengths of neighbourhood retail

Colin Mackay, Research & Investment Strategy Manager, Cromwell Property Group

According to the Property Council of Australia, the typical classification of a Neighbourhood is a local shopping centre comprising a supermarket and approximately 35 specialty shops, with total lettable retail area of less than 10,000 square metres. These assets cater for basic day-to-day retail needs and service the more immediate residential area.

The retail property landscape has faced a number of challenges over the past five years, from e-commerce to pandemic lockdowns, squeezed household wallets, and weak consumer sentiment. But one centre type has stood tall through it all – Neighbourhoods. These convenience-oriented centres are the cornerstones of local communities and offer a compelling investment proposition underpinned by several advantageous characteristics.

Income security

Neighbourhood shopping centres are supermarket-based and heavily weighted to blue chip tenants such as Woolworths, Coles and Aldi. These brands are strong, providing exceptional credit quality and security of income. Their leases are also long, typically 20 years with multiple options to extend, further reducing the variability of income received.

Demand stability

A selection of specialty tenants complements the grocery offer. These smaller shops often span essential categories such as food, services and healthcare, rather than non-essential items such as fashion. This tenant mix means Neighbourhoods are largely focused on meeting basic, long-term human needs rather than fleeting style or brand preferences. As a result, these assets benefit from steady demand and foot traffic, regardless of the business cycle or economic conditions, evident in the lower volatility of grocery sales.

Growth tailwinds

Positively, the lower volatility of grocery spending doesn’t come at the expense of growth. The category has recorded growth of 4.9% p.a. over the last 20 years, behind only Dining and Other (which includes online-only retailers)¹. One of the factors underpinning headline grocery trading performance is inflation. Since groceries are essential and demand is inelastic, price increases can be more readily passed on to consumers compared to non-essential items. Deflationary effects from technology advancement or cheaper offshore sourcing also apply to a lesser extent than in the case of categories such as electronics or clothing. Stronger headline sales growth supports sustainable rent increases, which escalate on a nominal basis.

E-commerce resilience

Growth through physical stores, rather than online, is most relevant for the performance of shopping centres. Over the last ten years, for every extra dollar spent on food (like groceries and dining), 16 cents went to online purchases. Meanwhile, non-food items lost 43 cents to online sales¹. In this regard, Neighbourhood centres have a favourable retail mix which is heavily weighted to food spending through supermarket and specialty grocery exposure. They also have a healthy weighting to categories which consumers must shop in-person, such as personal services (e.g. hairdressing). We also believe the shopping experience small local centres provide, underpinned by convenient carparking and wayfinding, further defends against loss of market share to e-commerce.

Bigger investment universe

Larger forms of retail investment, such as Regional shopping centres, can only be sustained in catchments with sizable populations (i.e. major metropolitan hubs). In contrast, Neighbourhood centres are found in cities and towns all across the country. This provides investors with a less constrained and more diverse investment universe which is around 30 times bigger (by number of assets). It allows exposure to a wider range of regions/catchments and their associated drivers of economic performance.

Investment liquidity

The Neighbourhood investment market is broader than other retail centre types, offering increased liquidity and supporting a competitive bidding process (and outcome) regardless of position within the economic or real estate cycle. Over the last decade, an average of 51 Neighbourhood centres transacted each year compared to 15 Sub-Regionals and 4 Regionals. Trading was most constrained in 2020, at the height of the pandemic. In that year, there was still 38 Neighbourhoods sold, while only 5 Sub-Regionals and no Regionals changed hands.

Fragmented sector

Ownership of Neighbourhoods is more fragmented than other retail centre types. While Regional shopping centres are typically owned by a small number of institutional investors, private investors are the dominant holders of Neighbourhoods. These private investors have different skills, goals, and priorities, which can affect how well the centres are maintained and managed. In our opinion, this presents opportunities for experienced managers to “add value” to assets through capital projects, leasing and operations, and increases the likelihood that an asset can be acquired and sold at favourable pricing.

Bringing home the bacon

Retail conditions are expected to improve over 2025, with consumer sentiment becoming more optimistic and real disposable household incomes increasing as inflation moderates and rate cuts materialise. Stronger retail conditions are a positive for Neighbourhoods, but these shopping centres will also benefit from their unique characteristics and advantages. The combination of strong, long-term leases to blue-chip tenants, consistent bricks and mortar demand for essential goods and services, and resilience to changing economic and capital market conditions has positioned Neighbourhood centres as a robust and attractive asset class.

Footnotes

Cromwell analysis of ABS data (Jan-25)

Home Archives for margot.allison@cromwell.com.au

April 24, 2025

March 2025 direct property market update

Economy¹

Events of the March quarter have been completely overshadowed by President Trump’s Rose Garden address on 2 April where he announced a universal 10% tariff would be applied to all US imports from 5 April, with higher tariffs to be applied from 9 April against countries with trade surpluses with the US. Taking the measures as announced, the US’s effective tariff rate is expected to increase to around 25%, a level last seen in the early 1900s².

In the near-term, a key impact to markets and the economy is heightened volatility and uncertainty. Indeed, product exemptions and a 90-day pause on the higher tariff rates (excluding China) have already been announced. While one of Trump’s stated objectives is to incentivise investment into US manufacturing, it will be challenging for companies to commit substantial capital and resources when the landscape could shift significantly by the time these words go to print, let alone the several years which would be required to reorganise supply chains and build facilities.

Equity and bond markets have seesawed as the prospect of stagflation – higher inflation and lower growth – shakes confidence. Positively for Australia, we’re better positioned than most to weather the storm. On the whole, direct trade impacts should be limited given the US only accounts for 4% of Australian exports³. Indirect impacts via a weaker Asian economy are a risk, and the extent of policy support in China will be closely watched. The floating Australian dollar is acting as a shock absorber, depreciating in value and enhancing the attractiveness of our key commodity exports.

Economic conditions at home are also in good shape. The labour market is healthy without being so tight as to cause inflationary wage pressures, the public sector is in a position to provide supportive spending if needed, and the RBA has scope to stimulate the economy via monetary policy. In February, the RBA made its long-awaited first interest rate cut, reducing the official cash rate to 4.1%. Looking ahead, National Australia Bank (NAB) expects further easing, forecasting a 50bps cut in May, followed by 25bps reductions in July, August, and November—potentially taking the cash rate to 2.85% by year-end. Other major banks predict a slightly slower pace, but all anticipate a more supportive interest rate environment, which bodes well for increased transactional activity and continued market recovery.

Looking ahead, National Australia Bank (NAB) expects further easing, forecasting a 50bps cut in May, followed by 25bps reductions in July, August, and November—potentially taking the cash rate to 2.85% by year-end.

Office

Analysis of JLL Research data indicates nearly 44,000 square metres (sqm) of positive net absorption was recorded across Australia’s major CBD markets in Q1 2025, marking the fifth consecutive quarter of space demand growth. The composition of demand was different from previous quarters, with Brisbane CBD the only market to contract and Melbourne CBD the top performer. This was the first time since early 2019 that Melbourne recorded the strongest growth in net demand, with the result underpinned by Coles’ 30,000 sqm centralisation from Hawthorn East into Docklands. Notably, this quarter also saw the largest gap in space demand between large⁴ and small occupiers nationally since before the pandemic, with large occupiers leading the way. Again, this was underpinned by leasing activity in Melbourne CBD.

The positive demand result and limited supply completions combined to lower the national CBD vacancy rate from 15.2% to 14.9%. Melbourne CBD was the big winner, with vacancy tightening by 1.2%pts. Sydney CBD vacancy also decreased, with every precinct except the Western Corridor tightening. Softer demand over the quarter led to Brisbane CBD’s vacancy rate rising, however it remains lower than the long-term average. The increase in Brisbane was driven entirely by Secondary grade stock – Prime vacancy remained at 7.3% and is below the long-term average, while Secondary vacancy increased by 0.8%pts. Canberra maintained its position as the tightest market in the country, however the vacancy rate did increase due to the completion of a new A grade development.

National CBD prime net face rent growth (+1.9%) accelerated over the quarter, taking annual growth to +5.6% which is its strongest pace since early 2018. While face rents in Perth and Adelaide were unchanged, all of the other CBD markets recorded quarterly growth well in excess of the long-term average. Prime incentives decreased in the Sydney CBD Core as some Premium assets recorded strong leasing outcomes. As a result, Sydney CBD Core delivered its strongest net effective rental growth since 2017 and the best outcome across the major CBDs. Incentives also declined slightly in Brisbane CBD, ensuring effective rental growth stayed in double-digit territory on an annual basis. Elevated vacancy in Melbourne CBD continued to put upwards pressure on incentives, dragging effective rental levels lower.

Transaction volume fell to $1.4 billion after a solid final quarter of 2024. Sydney CBD maintained its position as the top preference for capital, accounting for 73% of activity. Offshore capital was active again, with Japanese investor Daibiru making the largest acquisition of the quarter (135 King St). The trajectory of deal flow in Sydney will be watched closely over coming quarters, given it tends to act as a bellwether for the capital market cycle. Activity in Melbourne was very muted, weighed down by weaker property fundamentals and associated investor cautiousness. Average prime yields were unchanged across every CBD market and most non-CBD markets.

Retail

Retail sales growth has improved from the lows of 2023-24 but is yet to kick up materially. The tailwinds of moderating inflation, lower interest rates, and government cost-of-living supports are competing against a pessimistic and cautious consumer. While confidence was improving through the first quarter of the year, tariff uncertainty has now dampened sentiment.

Amidst stable demand, supply remains very constrained. There were only 13,000 sqm added to national core retail stock over the quarter, comprising two greenfield Neighbourhood centres servicing new housing estates. Muted supply has supported retail space market fundamentals and rental growth over the past year. While rents were largely unchanged across Regional and Sub-Regional centres this quarter, Neighbourhood centres recorded solid growth of 0.4% led by Sydney and Perth.

While retail transaction volume fell compared to last quarter, the $1.6 billion of deals done represented the second-strongest March quarter result in the history of the data series (back to 2007). The strong outcome was largely driven by large format retail and Regionals, with solid support from Sub-Regionals. Centuria’s acquisition of Logan SuperCentre ($115 million) was the dominant large format trade, while Northland Shopping Centre and Cockburn Gateway comprised the Regional deals. Northland was notable in being Victoria’s largest retail transaction since 2018.

This quarter provided further evidence that the cycle has started to turn for the retail sector. Regional shopping centre yields compressed in every market, while Sub-Regional yields compressed in every market bar Sydney.

Industrial

Occupier take-up (gross demand) continued to hold up, totalling just under 800k sqm which was the strongest March quarter in three years. While Transport, Postal & Warehousing, Manufacturing, and Retail & Wholesale Trade remained the top three industries from a demand perspective, it was the smaller and more volatile industries such as Professional Services, Mining, and Construction which experienced the strongest increase in demand relative to historical levels. Sydney recorded the highest level of gross space demand, headlined by Aldi’s pre-lease of an 87,000 sqm cold storage facility which is due to complete in 2027. The precinct this site is located in, Sydney Outer Central West, accounted for 37% of national demand and 86% of Sydney demand over the quarter.

Rent growth remains above the long-term average despite a weakening of demand relative to supply. Growth was more broad-based than last quarter, with face rents increasing in 17 of 22 precincts. The smaller markets of Adelaide and Perth recorded the strongest rental growth over the quarter, with Adelaide providing all of the top three precincts. Prime incentives continued to nudge higher across the east coast and Perth, reflecting a more competitive leasing environment.

Supply completions over the quarter were concentrated in Melbourne, as has generally been the case over the past five years. The West precinct was again the main provider of new space, however Melbourne South East was not far behind. It was a particularly muted quarter for development in Sydney, with only 43k sqm reaching completion versus the five-year quarterly average of more than 170k sqm. While a substantial pipeline of 1.5 million sqm remains under construction and due to complete in 2025, actual supply delivered may prove to be spread out over a longer horizon given projects continue to be delayed.

Industrial transaction volume fell below the quarterly average of the last five years as no major portfolio deals occurred. While Sydney accounted for the largest share of transactions by dollar value, Brisbane was the most active market compared to its historical average. Despite a relatively quiet quarter of dealmaking, there are signs the valuation cycle is starting to turn for industrial. Sydney, the bellwether market, recorded yield compression across most precincts.

Outlook

Where the global economy lands as a result of trade protectionism will depend on the duration barriers are in place, the extent of any retaliatory measures, and outcomes of trade negotiations. The situation is shifting on a daily basis, and the resultant uncertainty is having a dampening effect on economic activity.

While Australia is less exposed to the economic consequences than many other countries, there is a risk that growth weakens, and this could soften leasing demand in the near-term as companies take a cautious approach to investment and expansion. In this kind of environment, high-quality assets providing stable income from blue chip, resilient tenants are desirable.

Increased uncertainty may also affect liquidity in commercial property capital markets. Positively, Australia’s standing as a stable and reliable investment destination offering attractive returns has arguably been enhanced over the past month, and this could support acquisition activity from offshore capital. During this period of heightened volatility, focusing on underlying property fundamentals and sticking to a long-term strategy should hold investors in good stead.

Cromwell Direct Property Fund – March 2025 Quarterly Update

Below is the latest quarterly update for the Cromwell Direct Property Fund (the Fund), where we share key developments, portfolio performance, and what’s coming up in the months ahead.

Upcoming Liquidity Event – Periodic Withdrawal Opportunity

The Fund’s next Liquidity Event—its Periodic Withdrawal Opportunity—is proposed to commence in July 2025. Investors will receive an information pack in May, which will include market commentary and helpful insights to support your decision on whether to redeem some or all of your investment or remain invested as the market enters the recovery phase.

The Liquidity Event is designed to occur every five years, although the timing can be adjusted under certain circumstances. Under the current indicative timetable, investors will be able to submit withdrawal requests between 1 July and 5pm (AEST) on 31 July 2025.

For Unitholders who invest directly in the fund, requests must be submitted to our registry provider, Boardroom Pty Limited, using the specific Withdrawal Request form which will be provided to you via email, and uploaded to the Fund’s webpage, before the Notice Period commences.
For indirect investors, please consult your Adviser or IDPS operator who will submit requests on your behalf⁵.

Requests must be submitted to our registry provider, Boardroom Limited, using the specific form included in your information pack and available on the Fund’s webpages.

Redemptions will be processed in accordance with the Fund’s rules and may be funded through a mix of new capital, debt (subject to gearing limits), and potential asset sales. Depending on the number of requests received, and the liquidity available to the Fund from those sources, withdrawals may be paid in instalments over time, rather than as a single lump sum.

Full details will be provided in the information pack. If you have any questions about the Liquidity Event or would like to discuss your options, our Investor Services Team is here to assist.

Portfolio performance

The Fund’s portfolio continues to perform strongly, with occupancy at 96.5% and a weighted average lease expiry (WALE) of 3.6 years.

Our expert in-house Facilities Management team demonstrated exceptional responsiveness in early March as Cyclone Alfred approached South-East Queensland. Although downgraded to an ex-tropical cyclone by landfall, the storm caused damage to glazing at the 545 Queen Street building in Brisbane due to airborne debris. Emergency safety works were completed within days, with repairs managed efficiently in collaboration with specialist consultants and insurers.

Tenant engagement and Environmental, Social, and Governance (ESG) initiatives

Cromwell Funds Management continues to prioritise tenant engagement and ESG performance across the Fund’s assets. A variety of tenant-focused initiatives were delivered this quarter, including Welcome Back to Work, Valentine’s Day activations, International Women’s Day, the Share the Dignity drive, and Earth Hour. These events enhance tenant satisfaction and support strong lease renewals in a competitive market.

There were also several ESG milestones achieved:

Flinders Street, Townsville received its first 6-star NABERS Energy rating, a 5.5-star Water rating, and increased its Renewable Energy Indicator to 99.3%, thanks to its use of 100% green power since January last year.
Solar installations across multiple assets have led to reductions in base building electricity consumption by up to 27% over the past 6–9 months.
Results from the latest tenant survey showed that 61% of respondents consider ESG factors important or very important in their leasing decisions.

Recent building enhancement

A major upgrade to the heating system at 100 Creek Street, Brisbane, was completed during the quarter. This project included the installation of electric duct heaters, mechanical switchboards, and an upgrade to the Building Management System (BMS), ensuring a comfortable environment for tenants during the winter months. The works were delivered with minimal disruption and came in just under budget—a testament to the expertise of our Projects Team.