The Asset That Doesn’t Need a Rate Cut

There is a particular trap in property investing, and it catches thoughtful people as often as careless ones. A well-produced research report lands on the desk, the charts are clean, the conclusion is confident, and the reader absorbs not just the facts but the mood. The trouble is that the mood is often built on an assumption that has quietly stopped being true. Read enough of these documents and a pattern emerges. The best of them argue that an asset is worth owning on its own merits. The weaker ones argue that an asset is worth owning because something helpful is about to happen to it, usually cheaper money.

I recently read through two reports on Australian retail property, one by CBRE and one by Colliers. Both are bullish on shopping centres, and in many respects they are right to be. But they part company on why, and that difference matters more than either makes obvious. It is also the difference between a durable investment case and a hopeful one.

What actually changed under the forecast

The timing is what sharpens the point. For most of 2025 the market assumed the next move in Australian interest rates was down. That assumption has since been overtaken by events. The Reserve Bank has raised the cash rate three times this year and left it at 4.35 per cent at its June meeting, with the next decision due in August. A fresh inflation impulse from higher oil prices has been feeding through to other goods and services, and the Board has been explicit about not letting it become embedded.

Colliers’ own macro section captures this honestly. It notes that the market swung from pricing rate cuts to pricing multiple hikes, with trimmed mean inflation at 3.3 per cent in the year to December 2025 and the ten-year government bond yield climbing from around 4.1 per cent in October to around 4.8 per cent by mid-December, a level last seen in 2023.

The question worth asking

So the question is not whether Australian convenience and neighbourhood retail is attractive. It is whether the case survives without the rate cut. Our view is that it does, and that this is precisely the point. The argument for supermarket-anchored centres does not rest on the cost of money falling. It rests on things that are true regardless of where the cash rate sits: a shortage of new supply, income that people spend whether they feel wealthy or not, and a population growing faster than the shelves can be built to serve it.

There is even a piece of evidence hiding in plain sight in CBRE’s data. It is the most useful number in either document, and it has nothing to do with forecasts.

The number that matters most

During 2025, shopping centre capitalisation rates compressed even as bond yields rose. In plain terms, buyers paid more for these assets at a time when the risk-free return they were competing against was going up. CBRE notes that cap rate movement in shopping centres has been more modest than in other sectors through the hiking cycle.

An asset that firms in price while money gets more expensive is telling you something about the quality and reliability of its income. That is the signature of a defensive asset. It is the reason to look harder at this sector now, not despite higher-for-longer rates but because of them.

Supply has been priced out, not just slowed

The supply story is the spine of the argument. CBRE estimates just 0.7 million square metres of new shopping centre space across 2026 to 2028, most of it neighbourhood format, against population growth of about one million people over the same period. Delivery of regional and sub-regional centres is expected to total only around 230,000 square metres over three years. Colliers puts it more starkly still: no new regional shopping centre has been built in Australia since 2018, and none is forecast, leaving a projected shortfall of more than two million square metres by 2035.

The reason is economics, not fashion. CBRE reports that the gap between market rents and the cost to build has widened by 45 to 75 per cent, with recent geopolitical events capable of adding a further 18 per cent to construction costs across 2026 and 2027. When it costs far more to build a centre than the rent will justify, very few get built. Existing, well-located centres inherit the demand that new supply would otherwise have absorbed.

The income is groceries, not fashion

The second pillar is the nature of the income. A neighbourhood centre anchored by a full-line supermarket is not really selling discretionary retail. It is selling groceries, pharmacy, medical, childcare and the weekly errands that continue in good times and bad. CBRE notes that 94 per cent of regional and sub-regional centres carry at least two daily-needs supermarkets, and that online penetration of retail sits at around 15 per cent and is creeping higher by only about 0.6 per cent a year. Colliers frames the same point through occupancy, observing that Australia’s leading centres have averaged 98.9 per cent occupancy over the past decade against 94.6 per cent in the United States, and that online penetration here is roughly 13 per cent versus 34 per cent in the US.

This is what makes the income defensive. When household budgets tighten, people trade down within the supermarket rather than stop visiting it. Foot traffic to the anchor supports the specialty tenants around it, and the whole centre keeps trading. That distinction is central here.

More people, almost no new space

The third pillar is demand growth meeting a fixed shelf. CBRE has the population rising from 27.6 million in 2025 to 32.0 million by 2035, and retail sales heading toward $530 billion by the end of the decade. Colliers highlights how little floorspace there is to absorb that growth: Australian retail floorspace per capita sits at around 0.89 square metres, against 3.32 in the United States, one of the lowest ratios in the developed world. More people, more spending, and almost no new space is a simple equation with a clear direction.

The returns, and the part that may not repeat

The returns have followed. CBRE records neighbourhood centres as the sector’s best performer over the past decade at about 9.4 per cent a year, supported by both rising rents and cap rate compression. Colliers reports 2025 retail transaction volumes of $13.16 billion, up 48 per cent and the second-highest on record, with neighbourhood centres the second most-traded class at $2.89 billion. Institutions accounted for the majority of investment.

This is worth reading as evidence of conviction among large, well-resourced buyers, rather than as a promise of repeat performance. It also carries a warning inside it. Part of that ten-year return came from cap rate compression, and that is exactly the component a higher-for-longer world may not repeat. The rent growth can continue. The valuation tailwind is the part to treat with caution.

What could go wrong

A fair case names its risks. The most important is pricing. Much of the sector’s forward return in the research relies on further, if modest, cap rate compression. CBRE forecasts only around 10 basis points of it over three years, and its own charts show bond yields rising through 2026 to 2028. If rates stay high or move higher again, that compression may not arrive, and it could reverse. An investor should want the income to do the work, not the yield.

Construction cost inflation cuts both ways. It protects existing centres by strangling new supply, but it damages any strategy that depends on building, extending or redeveloping.

For direct and unlisted vehicles, liquidity is a real consideration, particularly for self-managed super and retiree investors who may need access to capital on their own timetable rather than the market’s. Property held directly cannot be sold in a morning.

There is also dispersion within the sector. CBRE’s own data shows the top quartile of centres generating more than $11,000 per square metre in sales while the tail earns far less. Asset selection, catchment quality and anchor covenant matter enormously. The label convenience retail does not by itself guarantee a good outcome.

What long-term investors should actually do

For long-term investors, the practical lesson is to separate the asset from the assumption. The reason to consider supermarket-anchored retail is its income durability, its supply-protected position and its exposure to population growth, not a forecast that borrowing costs are about to fall. Read every retail pitch with that filter. Where the case leans on cheaper money, discount it. Where it leans on scarcity, non-discretionary spending and a fixed amount of well-located floorspace, it is standing on firmer ground.

The right questions are about the anchor tenant, the lease structure, the catchment and the price paid relative to sustainable income. They are not about the next move from the Reserve Bank.

TAMIM Takeaway

Australia’s convenience and neighbourhood retail sector is genuinely well placed, but for reasons more durable than the ones some of the marketing emphasises. New supply has effectively been priced out by construction costs, the income is anchored by groceries and essential services that do not follow the discretionary cycle, and a fast-growing population is competing for a nearly fixed amount of floorspace.

The single most reassuring fact is that these assets held their pricing through a rising-rate environment. That is the mark of an asset that does not need a rate cut to justify itself. For long-term investors, the discipline is to buy the income and the scarcity, pay a sensible price, and treat any assumed fall in interest rates as a bonus rather than the thesis.