How to invest in retail property

If you’re looking for the potential for both regular income and capital growth as well as a way to diversify your portfolio, investing in the retail property sector could be a great option.

The flexibility of retail properties – especially in adapting to new trends like e-commerce and experiential retail – makes this sector dynamic and full of potential. Additionally, retail properties that rely on non-discretionary spending, such as daily needs retail or convenience centres, can also be quite resilient.

If you’re curious about whether retail property is the right move for you, let’s dive into why it can be an attractive investment, what you should consider before investing and the different ways you can invest.

What makes retail property an attractive investment?

There are several key reasons investing in retail property can be a good opportunity:

Income potential

One of the biggest attractions of retail property is the potential for steady, reliable cash flow. Retail tenants, especially larger chain stores or anchor tenants, can sign long-term leases that can span decades. This potential for steady cash flow can be a significant draw for investors seeking income.

Retail leases also include rent escalation clauses, where the rent increases over time, some in line with inflation. This means that income from retail properties can rise with inflation, helping to preserve the real value of rental income over time.

Capital growth opportunities

Retail properties in prime locations, or popular centres that attract lots of shoppers, tend to increase in value over time. Additionally, by improving the property, renovating, adding amenities or enhancing the tenant mix, a property’s appeal can increase and, ultimately, its value may also increase. Whether it’s revamping an outdated storefront or attracting a mix of tenants that draw in shoppers, there’s room to create added value.

Diversification benefits

Retail properties often perform differently than other asset classes and property sectors. By including a retail property investment in a portfolio, investors can increase diversification, helping to stabilise their portfolios during market cycles.

Flexibility in the face of change

The rise of e-commerce has changed the way people shop but it hasn’t made retail properties obsolete. In fact, the retail property sector has shown a remarkable ability to evolve in response to these changing trends.¹

Many retailers are adopting an omnichannel approach, using both physical stores and online platforms to serve customers. The rise of experiential retail, where stores offer unique in-person experiences, also keeps physical spaces relevant, giving consumers reasons to visit beyond simply shopping.

What to consider before investing

While retail property investments offer several advantages, they also come with risks. Here’s a summary of the key risks that should be considered before investing in the sector:

Economic conditions

Retail properties are vulnerable to economic downturns as consumer spending tends to drop when the economy slows. Investing in retail properties that offer essential goods and services can help reduce this risk as they tend to perform better in tough economic times.

Location-specific risks

The success of any property is largely tied to its location. Investing in areas with strong growth potential is the best defence against location specific risk, making it important to do in-depth research on local economic and demographic trends.

Tenant risks

There’s always a risk that a tenant could default on rent or not renew their lease. Long leases with established tenants and strong covenants help to minimise tenant-specific risks.

Many retail properties, especially shopping centres, have multiple tenants, which helps reduce risk. If one tenant moves out or goes out of business, other tenants are still providing rental income. Investing in retail properties with a diverse tenant mix helps mitigate the impact of vacancies or defaults.

Operating costs

Retail properties can come with significant operating costs, such as maintenance, insurance and security. These costs can eat into your profits if not managed properly, making asset management experience critically important to successful investment in this sector.

How to invest in retail property

There are a few different ways to invest in the retail property market, each having different advantages and disadvantages depending on the goals of investors. Three of the most common ways to invest include direct ownership, real estate investment trusts and unlisted property funds.

1. Direct ownership

One of the most straightforward ways to invest in retail property is to purchase a property outright and rent it out to tenants. Direct ownership allows complete control over the property, meaning investors take on the risks of finding tenants, dealing with vacancies and handling ongoing property and asset management.

2. Real Estate Investment Trusts (REITs)

For those looking for a more hands-off and liquid investment, REITs offer a great alternative. A real estate investment trust is a unitised portfolio of property assets listed on a stock or securities exchange that can be traded through a stockbroker.

By investing in a retail-focused REIT, you can gain exposure to the sector without having to directly manage the properties yourself. REITs can also provide diversification, as they often invest in a range of properties, reducing the risk of relying on a single tenant or location.

While REITs are one of the most liquid ways to gain exposure to the retail property sector, they are also subject to market fluctuations. This means the value of your investment will rise and fall more frequently than other types of investments.

3. Retail-focused unlisted property funds

Unlisted property funds pool investors’ money to purchase retail properties. These funds allow you to invest in larger or more diversified portfolios than you might be able to afford individually.

Although these kinds of investments tend to be less liquid with fixed (often five year) terms on most, they are professionally managed, which relieves investors from day-to-day responsibilities.

Before making any investment decisions, investors should consult with a financial adviser and request a product disclosure statement for funds to ensure their chosen investment suits their investment goals, time horizon and risk tolerance.

1. Source: CBRE, Australian Cap Rate Outlook report, December 2024.