Australia’s retail property sector carried significant momentum into 2026 after outperforming all other commercial property classes last year.
However, new geopolitical pressures are already cooling investor activity, according to Knight Frank’s latest Australian Retail Review.
The sector delivered annual total returns of 9.2% in 2025, fuelled by accelerating household spending, tightening supply and improved retailer profitability.
Investor demand surged in response, pushing total retail transaction volumes to $14.4 billion last year – up 43% on the previous year.
That appetite continued into early 2026, with around $3.6 billion in transactions recorded during the first quarter.
But the firm’s research flags a shift in sentiment.
“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,” said Alistair Read, senior economist at Knight Frank.
The report points to the outbreak of conflict in the Middle East as a key downside risk, with flow-on effects including higher fuel prices, supply chain cost pressures and recent interest rate increases collectively squeezing household budgets.
Early consumer sentiment data suggests confidence is already softening, according to the research.
“Higher fuel prices, flow-on cost pressures across supply chains, and recent interest rate increases are collectively squeezing household budgets,” 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 review shows household spending rose 4.6% year-on-year to February 2026, reflecting improving real incomes and a shift by households from saving back toward consumption.
This fed directly into tenant performance, with average EBIT margins across major retailers rising to 8.9% in the first half of 2026 – their strongest level in several years.
Average retail leasing spreads rose 4.2% in 2025, helping lift income returns and underpin capital values.
“Retailers have generally been better able to absorb costs, rebuild margins and support sustainable rental outcomes, particularly in higher-quality centres,” Mr Read said.
Despite near-term uncertainty, Knight Frank expects medium-term fundamentals to remain supportive, citing a constrained development pipeline, elevated construction costs and limited feasibility for new supply.
“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.”