Knight Frank’s latest Australian Retail Review report shows retail property transactions hit $7.5 billion in the first half of 2026, up 12% on the same period last year.
A further $2.8 billion in deals closed in the third quarter, with $4 billion in transactions pending.
We spoke to Knight Frank Senior Economist Alistair Read about whether the sector can maintain its momentum.
Spending power lifts retail prospects
Stronger spending and competition for tenancies are supporting retailer performance and rents.
Household spending rose 6.8% in the year to August, while average earnings before interest and tax margins among a selection of major retailers reached 8% in 2025-26, the report found.
Meanwhile, vacancy rates fell to their lowest level in more than a decade. Across 95 publicly listed retail assets, re-leasing spreads reached 4.6% while occupancy costs remained stable at 14.2%.
Mr Read said the resilience of consumer spending was bolstering demand.
However, very little new space is being built.
“As a result, retailers are competing for a shrinking pool of available space, and that is giving landlords the upper hand on rents,” Mr Read said.
“With construction costs keeping new centres off the table, that balance is unlikely to shift any time soon, which supports an outlook for resilient rental growth.”
Rental income takes centre stage
With borrowing costs elevated, rental growth is becoming increasingly important to investment performance.
The report puts annual retail property returns at 9.8%, while yields held steady at 5.6% in the second quarter.
Capital values rose 0.5% in the second quarter, taking annual capital growth to 3.7% - the strongest annual result since the December quarter of 2017.
Rental growth will need to do the heavy lifting for returns in coming years, Mr Read said.
“With inflation and interest rates likely to stay higher for longer, investors can no longer bank on falling yields to drive performance,” he said.
“The assets that outperform in this environment will be those where investors have a clear strategy to deliver sustained income growth.”
Landlords move early to lock in tenants
With competition for suitable premises intensifying, landlords are committing capital years before major leases expire to retain tenants and protect future income.
Knight Frank’s report identifies early lease renewals among major and large-format tenants as a growing trend.
It also points to demand for entertainment and experience-led offerings, changes to large-format premises, and renewed interest from institutional investors.
Mr Read said the downsizing of department stores had given the remaining majors more options than they have had in years.
“Landlords are no longer waiting for leases to expire and risking losing tenants to alternative space,” he said.
“Over the past six months, owners have begun putting capital on the table, often years ahead of expiry, to incentivise tenants to stay and lock in lease extensions.”
He said super funds were also buying shopping centres again after years on the sidelines, which was a strong vote of confidence in the sector’s fundamentals.
Rate rises remain a risk
That confidence could be tested if interest rates rise further or inflation picks up again heading into 2027.
A slowdown in the housing market could also weigh on discretionary spending.
How well rental income holds up against these pressures will be critical to performance over the next 12 to 18 months.
“The biggest risk is that higher interest rates and a softening housing market finally catch up with the consumer, with household goods and large format retail the most exposed,” Mr Read said.
Retailers are also contending with rising costs, leaving margins vulnerable if sales slow.
“Household spending growth is likely to cool over the coming year, but with little new supply coming, retail is better placed than most sectors to ride it out,” he said.
