6th Consecutive Year-On-Year Decline

The pressure is widespread across most of the major retail categories, except for Clothing and Footwear Retail (+10.3% real year-on-year growth) interestingly. Even the less cyclical “General Dealers” saw a decline of -3.7%, impacted not only by rising interest rates and a weakening economy pressuring consumer disposable income, but also by a recent food price inflation surge.

But it is in Home-related retail where the pressure is perhaps seen more, “Household furniture, appliances and equipment” retail declining by a more severe -5.8%, and “Hardware, paint and glass” retail sales by an even larger -8.7% year-on-year. More significant drops in these two latter categories makes sense, given that many home-related purchases and maintenance items are postpone-able in tough financial times, such as the current time.

This keeps the pressure on for retail shopping centres, likely sustaining the recent slowdown in growth in retail centre trading densities seen in MSCI 1st quarter numbers. All 5 main shopping centre categories (Super Regional, Regional, Small Regional, Community and Neighbourhood) showed slowing trading density growth as at the 1st quarter of 2023, following on the post-lockdown recovery through 2021/22, and 3 of the 5 centre categories already saw real (inflation-adjusted) year-on year declines in trading densities in the 1st quarter.

TPN tenant data, as at the 1st quarter of 2023, had not yet shown any recent deterioration in retail tenant rental payment performance, Q1-2023 percentage of retail tenants in good standing at 73.4% of the total. However, further declines in real retail sales value subsequent to the 2nd quarter (as the full impact of interest rate hiking and economic slowdown has yet to be felt) leads us to expect that this tenant payment performance will deteriorate into the 2nd half of the year.

This, in turn, is likely to keep the pressure up on base rental growth in the retail property sector, with landlord “pricing power” weak as tenants battle under the pressure. The retail property sector is not only pressured by declining real retail sales. It is also battling with above-inflation municipal rates and tariff hikes in certain instance, while also required to seek costly electricity alternatives as power supply reliability deteriorates.

First quarter MSCI data has shown recent slowing in year-on-year growth in base rental/square metre in all 5 main centre size categories (Super Regional, Regional, Small Regional, Community and Neighbourhood), and when we adjust it to real terms, all 5 of the categories were already in year-on-year decline in the 1st quarter.

In short, the declining May 2023 real retail sales numbers point to a likely continuation of the recent weakening in the retail property market on a national aggregated basis.