For much of the past decade, Australian retail property has been viewed through the lens of disruption.

The rise of e-commerce, changing consumer behaviour, COVID-19 and higher interest rates all contributed to a narrative that retail was a sector in structural decline. Asset pricing reflected that view.

Today, the operating fundamentals tell a different story.

Retail sales are 55% higher than a decade ago¹. Inflation is up 36% over the same period². Yet retail asset values have increased by just 9.1%³.

That gap warrants attention.

While geopolitical uncertainty and a softer consumer backdrop may create periods of volatility, the disconnect between asset pricing and underlying income performance suggests Australian retail deserves fresh consideration from investors.

The key question is not whether retail fundamentals have improved. Evidence across much of the sector suggests they have.

The question is whether valuations have fully reflected that recovery.

A useful place to start is income.

Retail property ultimately derives its value from the strength and durability of tenant cashflows. By that measure, the sector appears healthier than many expected.

Vacancy across Australian retail sits at 3.9%, near historic lows. We see similar trends within DWSF, where vacancy was just 1% at 30 June 2026. Occupancy costs have fallen from their 2018 peak, providing tenants with greater headroom to absorb rental growth, while positive re-leasing spreads have now been sustained for more than 12 months. Retailer profitability has also stabilised after a period of significant margin pressure, with retailers increasingly embracing omni-channel models to deliver a seamless customer experience across their e-commerce and physical store networks.

Importantly, these are not the characteristics of a sector under distress.

They are indicators of a market where demand is firm, vacancy is low and new supply is increasingly constrained.

The improvement is not being driven solely by inflation either.

Consumer spending continues to be supported by population growth, with Australian retail sales forecast to grow by around 3.6% per annum over the next decade⁴. Australia's population is expected to remain one of the fastest growing among developed economies, providing a durable source of demand that extends beyond the economic cycle.

At the same time, the supply side has become increasingly constrained.

Australia will require an additional 3.7 million square metres of retail floorspace by 2030 to maintain current provision levels yet forecast supply falls more than 3.1 million square metres short of that requirement. New construction remains limited, with elevated development costs, planning constraints and land availability creating significant barriers to entry. Construction costs alone have risen approximately 78% since 2007. CBRE estimates that geopolitical disruption could add 18% to construction costs over 2026-27, widening the gap between current rents and the cost of developing new stock.

For investors, that matters.

Many real estate sectors can respond relatively quickly to improving fundamentals through new supply. Retail is becoming increasingly different. Existing, well-located centres are likely to benefit from demand growth that is difficult to replicate through development.

Government policy is reinforcing the trend.

Across Australia's major cities, planning frameworks are increasingly directing population growth towards established urban locations rather than greenfield expansion. In many cases, these areas are characterised by limited opportunities for new retail development, supporting the strategic importance of existing centres. As density increases around established retail precincts, those assets are well positioned to benefit from higher levels of customer demand and retail productivity.

Another factor often overlooked is the role of physical retail in a digital economy.

The assumption that online growth would inevitably erode the relevance of shopping centres has not played out as many expected. Online penetration in Australia has stabilised well below levels seen in the United States and United Kingdom, while physical stores remain central to retailers' fulfilment, customer acquisition and brand strategies.

Increasingly, retailers are viewing stores not simply as points of sale but as critical operating infrastructure, and are demanding larger store footprints as a result.

The recent expansion of formerly digital-native brands such as Adore Beauty and LSKD into physical stores reflects a broader recognition that omnichannel retail often performs best, and provides additional growth and market share, when online and physical channels work together rather than compete.

None of this suggests all retail assets will perform equally. Dexus's premium retail portfolio delivered 5.2% value growth over the year to 30 June 2026, compared with 2.8% for the non-premium regional retail portfolio. More broadly, Australian retail property funds delivered a total return of 10.25% for the same period, compared to industrial at 10.74%, office at 7.84% and all property funds at 9.04%⁵.

Asset quality, trade area demographics, tenant mix and operational capability remain critical drivers of performance. As in every property cycle, selectivity matters.

Nor does it suggest retail is immune from cyclical risks. Consumer confidence, interest rates and global economic conditions will continue to influence outcomes.

What it does suggest is that the current debate may be asking the wrong question.

For years, investors have focused on whether retail could survive structural disruption. That question has largely been answered.

Today's challenge is determining whether asset pricing appropriately reflects a sector characterised by low vacancy, improving rental growth, constrained supply and population-led demand growth. These same factors may also provide a foundation for continued income growth over the medium to long-term.  

For long-term investors, the more interesting opportunity may not lie in identifying where fundamentals are improving, but identifying where valuation has yet to price in the sector's earnings potential and the increasingly favourable supply-demand dynamics underpinning it.

_{[1] ABS retail turnover, January 2026}

_{[2] Oxford Economics, January 2026}

_{[3] MSCI Retail Asset Value Index, December 2025}

^[4] _{Oxford Economics}

_{[5] MSCI/Mercer Australia Core Wholesale Property Fund Index 12 months to 30 June 2026}