RETAIL PROPERTY BOOM FACES NEW RISKS AS GEOPOLITICS CLOUDS OUTLOOK
Strong consumer spending and tight supply have driven retail to the top of commercial property, but signs of pressure are starting to emerge.
2 min
Australia’s retail property sector entered 2026 as the strongest performing commercial asset class, but rising geopolitical risks and cost pressures are beginning to test its resilience, according to new research from Knight Frank.
The latest Australian Retail Review shows the sector rode a wave of consumer spending and constrained supply through 2025, delivering total returns of 9.2 per cent and driving transaction volumes up 43 per cent year-on-year to $14.4 billion.
That momentum carried into early 2026, with around $3.6 billion in deals recorded in the first quarter alone.
“Retail clearly emerged as the standout commercial property performer in 2025,” said Knight Frank Senior Economist, Research & Consulting Alistair Read.
“Improving household spending, limited new supply and stronger leasing fundamentals combined to drive better income growth and renewed investor confidence in the sector.”
Spending rebound drives retail strength
A lift in household spending has been central to the sector’s performance. Consumer spending rose 4.6 per cent year-on-year to February 2026, supported by easing inflation and improving real incomes.
That shift flowed directly into retailer performance, with average EBIT margins across major retailers rising to 8.9 per cent in the first half of 2026, their strongest level in several years.
“Stronger consumer spending was critical in restoring momentum to the retail sector,” Mr Read said.
“Retailers have generally been better able to absorb costs, rebuild margins and support sustainable rental outcomes, particularly in higher-quality centres.”
Improved trading conditions also pushed leasing spreads up 4.2 per cent in 2025, reinforcing income growth and supporting capital values.
Geopolitical tensions begin to bite
But the outlook has become more complicated. The report warns that escalating conflict in the Middle East and its impact on fuel prices, supply chains and interest rates could weigh heavily on consumer spending.
“Higher fuel prices, flow-on cost pressures across supply chains, and recent interest rate increases are collectively squeezing household budgets, and early consumer sentiment data suggests confidence is already softening,” Mr Read said.
“While household balance sheets remain generally resilient, heightened uncertainty over future costs is likely to weigh on spending — particularly in discretionary categories — in the months ahead.”
The impact is already being felt in investment activity. While the year began strongly, transaction volumes slowed in March as investors paused amid the uncertainty.
“Early indicators suggest elevated uncertainty has already begun to affect the market. While retail investment enjoyed its strongest start to a year in a decade, with nearly $3 billion transacted by the end of February, activity stalled in March, as investors took a pause amid elevated uncertainty,” Mr Read said.
Solid foundations support medium-term outlook
Despite the near-term headwinds, Knight Frank maintains that the sector’s underlying fundamentals remain strong. Limited new supply, high construction costs and population growth are expected to continue supporting rental growth over the medium term.
“Retail has entered this period of uncertainty from a position of strength,” Mr Read said.
“Supply-side constraints, population growth and improving income fundamentals remain powerful structural supports for the sector.”
The report highlights several trends shaping the year ahead, including steady yields as interest rates rise, mounting pressure on tenant margins, continued outperformance of prime centres, the growing need for logistics integration, and risks linked to underinvestment in capital expenditure.
For now, retail remains a sector with momentum, but one increasingly at the mercy of forces far beyond the shopping centre.
As interest rates, inflation and market sentiment fluctuate, investors are being urged to focus on data, not panic.
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The Federal Budget has created a supply freeze that could push rents higher, reduce investment and hand more of Australia’s housing stock to offshore institutions.
4 min
For months, I have been one of the few commentators openly stating what the data was already showing: property prices had begun to fall.
The latest figures confirm it. Cotality’s June 1 Home Value Index showed Sydney values down 0.9 per cent in May and Melbourne down 0.8 per cent. ANZ has cut its national capital city forecast to 2.8 per cent growth this year, down from 4.8 per cent in April. CBA has also downgraded its outlook.
So the Federal Budget arrived at the worst possible time, with the wrong prescription, to treat a problem it fundamentally misunderstands.
Treasurer Jim Chalmers has suggested that making it easier for first-home buyers to get a fair crack at auctions is a good thing. The reality is more complicated.
Driving property prices down does not simply hand a discount to first-home buyers. It affects the 1.4 million Australians employed by the property sector, the 67 per cent of household wealth tied to housing, and the state government revenues that fund schools, hospitals and roads.
The government had a choice: tackle supply constraints, link migration growth to housing completions and reduce spending, or increase taxes on property investors. It chose the latter.
Property is an economic pillar
Property is not simply another investment class. It contributes about 10.6 per cent of GDP directly, up to 15 per cent when flow-on effects are included, and employs more than 1.4 million Australians. It also generates more tax revenue than mining and underpins consumer confidence through the wealth effect.
Against that backdrop, the Budget removed negative gearing from established residential properties purchased after Budget night and replaced the 50 per cent capital gains tax discount with cost-base indexation and a 30 per cent minimum tax from July 1, 2027.
The government calls this fairness. I call it a misdiagnosis.
The grandfathering trap
The policy is also internally contradictory.
Properties purchased before Budget night are grandfathered, allowing existing investors to retain full negative gearing and capital gains tax benefits until they sell. The logical response is simple: hold.
That means fewer properties coming onto the market, fewer rental listings and reduced transaction volumes.
The result is likely to be higher rents, reduced stamp duty revenue and further inflationary pressure at a time when the Reserve Bank remains focused on bringing inflation under control.
The government is attempting to fight inflation with one hand while fuelling it with the other.
Who really owns investment properties?
What is often lost in this debate is who Australia’s property investors actually are.
According to ATO data, 71 per cent of investors own just one investment property. They are not wealthy property moguls.
They are teachers, nurses, police officers and small business owners who have purchased an investment property as part of their retirement strategy.
For many Australians, property remains the most tangible and trusted pathway to building long-term wealth.
Removing the incentives that supported that investment does not hurt a billionaire developer. It hurts ordinary Australians trying to secure their financial future.
Investors aren’t the affordability problem
It is true that housing affordability has deteriorated significantly over the past two decades. However, negative gearing is not the primary cause.
Research by economists Ross Kendall and Peter Tulip found planning and zoning restrictions significantly increase housing costs.
Their work showed zoning lifted detached house prices well above marginal construction costs in Sydney, Melbourne, Brisbane and Perth.
Low interest rates, strong population growth, chronic under-supply and restricted access to development-ready land have all played a much larger role in pushing prices higher.
Punishing private investors does nothing to address these structural issues.
The Build-to-Rent advantage
At the same time the government is reducing incentives for Australian investors, it has created a more attractive tax environment for foreign institutional capital through Build-to-Rent projects.
Under current arrangements, foreign institutional investors can access a 15 per cent withholding tax rate through Managed Investment Trusts, accelerated depreciation benefits and exemptions from the new negative gearing restrictions.
State governments have added further concessions, including land tax reductions and exemptions from foreign investor surcharges.
Australian mum-and-dad investors receive none of these advantages.
The cumulative effect is striking. Foreign institutions can access a range of tax benefits unavailable to Australian private investors, while local investors lose concessions they have relied upon for decades.
This is not solving the housing crisis. It risks transferring ownership of Australia’s rental housing stock from local investors to offshore institutions.
Why state governments should worry
There are already signs these changes are affecting the credit cycle.
Major banks are removing negative gearing benefits from serviceability calculations for investment loans.
As market conditions soften, lenders become more cautious and investors find it harder to secure finance.
That matters because property transactions are a major source of state government revenue.
In NSW alone, transfer duty generates more than $12 billion annually. If transaction volumes fall significantly, the impact on state budgets will be substantial.
The consequences extend beyond stamp duty to GST collections, payroll tax receipts and land tax revenue.
The 95 per cent loan trap
There is another aspect of the Budget that concerns me.
The government has expanded first-home buyer deposit guarantee schemes, allowing eligible purchasers to buy with a five per cent deposit backed by the Commonwealth.
The intention is admirable. The timing may not be.
If prices in Sydney and Melbourne fall further, buyers entering the market with 95 per cent loan-to-value mortgages could quickly find themselves in negative equity.
They become trapped. They cannot sell without crystallising a loss, while the taxpayer guarantees the loan and the bank remains protected.
That is not wealth creation. It is a debt obligation.
After three decades working with debt and investment, I would never encourage my own children to borrow at a 95 per cent loan-to-value ratio.
A policy built on politics
The government had an opportunity to address the housing crisis by encouraging supply, reforming planning systems and reducing development costs.
Instead, it chose Robin Hood politics.
The optics may be appealing, but the economics are not.
Australians may ultimately pay the price through higher rents, weaker investment and a future in which an increasing share of the nation’s housing stock is owned by offshore institutions rather than local investors.
Paul Miron is the Co-Founder & Fund Manager of Msquared Capital.
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