Foreign investment, a weaker Australian dollar and the improving housing market are all factors contributing to gains in Australia’s retail sector, according to the latest retail white paper from Colliers International.“Can recent consumer spending growth be sustained?” provides an insight into the key economic trends which have driven the highest annual retail sales turnover growth since November 2009.
“The healthy increase in retail spending over the past six months annualises out at a very strong 9.4% per annum,” said Michael Bate, Head of Retail at Colliers International. “There are many factors contributing to this, but one of the more interesting drivers is the amount of foreign investment in Australian property.
“The impact of offshore investors on the residential market has a flow-on effect for the retail sector via increased demand and prices for housing. Increasing residential property values impact on how wealthy consumers feel and in turn their propensity to spend. Additionally there has also been a direct impact on retail spending, as many of these foreign buyers, particularly the Asian buyers, are making the most of the lower Australian dollar to purchase their luxury retail goods here in Australia.”
According to the most recent data available from the Foreign Investment Review Board (FIRB) there was $17.2 billion worth of approved residential property investment coming in from overseas in the year to June 2013. Chinese buyers are currently spending approximately $5.9 billion a year on Australian property (both residential and commercial). The strong purchasing power of Asian consumers and their preference for luxury goods will further support growth in retail spending through the current cycle.
The weaker Australia Dollar is also a key factor in the improving retail sector.
“Since August 2013 the AUD has fallen approximately 10% to its current levels around US90 cents,” said Nora Farren Director of Research at Colliers International and author of the report. “This level is supportive of not only attracting more overseas visitors to Australia, but also acts as a disincentive for Australians to take offshore holidays, particularly to the US. While net tourism flow has previously been a major negative, this should reverse.”
The falling aussie dollar has also had an impact on Australians shopping online with international retailers.
“According to the NAB Online Retail Sales Index, annual growth is running at 11.3%,” said Ms Farren. “While still prolific, recent online growth has been more subdued than the 20-30% growth rates recorded between 2010 and 2012. A substantial gap now also exists between the stronger growth in domestic online retailing, and the virtual stall in growth in international online sales, which is most likely currency related. The good news for domestic retailers is that they are winning a greater proportion of total online sales revenue, with around 74% of online retail sales. This has occurred as Australian bricks-and-mortar retailers are increasingly developing sophisticated online offerings to complement their traditional shopfronts.”
While traditionally there is a strong relationship between consumer sentiment levels and movements in retail turnover, the last few months has seen a disconnect emerge. The level of consumer sentiment declined in both December 2013 and in the first two months of 2014, yet retail sales turnover growth was much stronger than would normally be expected. There are some caveats around seasonality across the December-January Christmas and sales period, but overall recent indicators of broad consumption are positive.
“The recovery in retail sales will continue to be driven by the low interest rate environment, a strong housing market and improving consumer sentiment and business confidence,” said Mr Bate. “However, we can’t discount our increasing population, which increased by 1.8% to June 2013, which is the largest annual increase since September 2009.”