CEO OUTLOOK 2023: Dexus

a recent visit to Indooroopilly Shopping Centre. You could feel the shopping centre was buzzing, family and friends shopping and exploring the centre. It made me excited. Excited for our retailers and the community that after three years, bricks-and-mortar stores are back in a big way. Year in review Over the past year, we have seen bricks-and-mortar retail trade up 11.9% year on year, which is well above pre-COVID growth trends. At the same time, we have seen online growth rates come off from lockdown highs, as physical retail rebounded. This is consistent with what we have seen across our portfolio, with most of our centres well above pre-COVID sales levels. We have seen the largest growth in discretionary services (food catering, retail services and entertainment) which is consistent with what we are seeing in the broader market commentary, reflecting pent up demand and high levels of savings. The catchup in discretionary spending has benefited larger centres with a high proportion of specialty clothing and dining retailers. Melbourne Cup activation, 25 martin Place, Sydney However, while COVID is firmly in the rear-view mirror, inflation, interest rates and other cost of living pressures are now starting to impact discretionary spending. That is why, more than ever, our centres must provide the retail environment where consumers choose to spend their discretionary time and money. We see growth over the medium term will come from aligning tenant mix more closely with the broader customer wallet, including healthcare, recreation and education, which are not traditional elements of the centre mix. As I flagged in last year’s outlook, consumer preferences continue to evolve, and our shopping centres are adapting. We continue to leverage technology to gain insights into how best we engage with the community, in turn, driving foot traffic and dwell time. These insights have helped us differentiate the customers’ experience from customer service through to operations. All these touch points that come together to create frictionless retail experience. We continue to see a strong shift from retailers to an omnichannel retail strategy, where instead of competing against online stores, the best performers are creating a seamless experience for customers. Over the year, we have seen spectacular activations, events, pop-ups and other experiences that created a more engaging and enjoyable experience for customers. As shopping centre managers, we have been big supporters of these activations and will continue to support our retailers as well as delivering our own activations. Centre wide activations have been extremely valuable in driving off-peak foot traffic. In celebration of Lunar New Year, working closely with retailers, our centres delivered diverse and exciting activations including special banquets and giveaways. We also expect to see an uptick in Sydney from WorldPride 2023 with many of our centres participating in this city-wide event. Lunar New Year activation, QV Melbourne We have continued to see the ESG performance of our centres and retailers play an increasing role in purchasing decisions. At a centre level, we are working with retailers to design out waste, and have supported our retailers to comply with state-wide bans on single-use plastics and ensured our centre operations are set up to support specialised recycling programs. A recent study by McKinsey noted consumers are shifting their spending towards products with ESG-related claims and we are seeing that trend in the product mix from retailers. It is fantastic to see major brands featuring fully recycled products. At a portfolio level, we continue to evaluate our centres against global best practices in waste management, emissions reductions and environmental governance. Earlier this year, we announced the remaining retail assets on the east coast will be 100% powered by renewable energy. This was an important milestone on our sustainability journey, but also is critical for our retailers that have their own sustainability targets. Leveraging the ESG expertise of the Dexus team, we will now consider how we can work with our retailers to address Scope 3 emissions. When our retailers thrive, our assets thrive As long-term owners of retail assets, we understand and value the important role our centres have in the community. As I experienced at Macquarie Centre, the popularity of our centres continues to evolve as a focal point for the community. Whether catching up with friends and family, doing the weekly shop or to find entertainment, the answer to ‘why’ customers visit our centres has never been so diverse. Activated CBD retail precincts and luxury retail As office occupancy continues to steadily increase, city retail is responding through leading design that delivers world-class food and beverage, and enhanced amenities. Precincts such as Quay Quarter Lanes, 25 Martin Place in Sydney and QV Melbourne have been reimagined to combine the best bars, restaurants and retail offerings, supporting the office workers by day and drawing people into our CBDs, supporting the night time economy. Luxury brands in particular have remained resilient and continue to invest in premium in-store experiences for their customers. International tourism has traditionally driven high-end luxury demand and, as international travel continues to recover, we expect to seethis reflected in foot traffic. For these valuable consumers, it is about the whole of precinct experience, which includes the level of dining these customers are seeking. Macquarie Centre, NSW What’s next? Our development focus for 2023 will be to further progress our capital improvement program across the portfolio. In particular, the development of the DA approved evolution of our flagship, Macquarie Centre. The future vision of Macquarie Centre will deliver a truly unique and dominant town centre, providing a modern entertainment, lifestyle and food and beverage precinct. Utilising Dexus’s development expertise, we will integrate both the workplace and living spaces with one of Australia’s top shopping centres, creating a destination where people want to live, work and play. Additionally, we will be lending our retail experience to support other major city-shaping projects currently underway such as Waterfront Brisbane and Atlassian Central in Sydney. These developments take a precinct approach to major mixed use developments, and are set to deliver a global standard mix of office, commercial, retail and public amenity. As our portfolio continues to evolve, our retail leasing team will continue to take an evidence-based approach to our retail mix, leveraging both qualitative and quantitative research to inform our leasing decisions. Our retailers are the face of our centres and we will continue to have meaningful relationships with the thousands of retailers as we work with them, supporting them to thrive. Outlook We are incredibly excited to be joining the Dexus platform. The combination of our proven history in retail combined with Dexus’s real estate expertise will create a truly leading real estate business. There are many reasons to be optimistic about the retail sector as a whole and while cost of living pressures will dampen consumer spending, compelling retail offerings will continue to draw the crowds. We look forward to working with our retailers and investors to deliver sustainable returns for years to come.