The coronavirus pandemic has torn through the A-REIT sector and the rough ride is not over yet for retail property landlords. Picture: Alex Coppel.
The prospect of more lockdowns across Australia to control the coronavirus pandemic has prompted a warning from credit agency Moody’s Investors Service that virus flare-ups and weak consumer sentiment are delaying retail sector recovery.
The agency said outbreaks like the surge in Victoria and subsequent strict stage 4 lockdown would put the performance of Australian retail real estate investment trusts, like Westfield-owner Scentre Group and Chadstone co-owner Vicinity Centres, under pressure.
“The state of disaster that has been declared in Victoria and the closure of all discretionary retail will further reduce already weak retail earnings and further weaken tenant quality,” Moody’s vice-president Saranga Ranasinghe said.
“The pandemic is also accelerating e-commerce penetration in Australia, and we believe some of this shift will be permanent, creating the need for shopping malls to further evolve operations to meet changing consumer preferences,” Ranasinghe added.
Disputes between landlords and tenants
Developers have flagged longer term plans for mixed use schemes but the retail sector has been transfixed by disputes between major landlords and tenants like Solomon Lew’s Premier Investments, which has refused to pay rents when it shops were closed due to the pandemic and is also seeking new deals linked to sales turnover.
Scentre shares jumped on Monday after the reopening of the Mosaic Brands shops in Westfield centres as a sign that the landlord had settled the dispute in its favour.
But there is also ongoing pressure from major chains looking to reduce their store footprints and some smaller outlets are not expected to reopen, piling pressure on rents and values, particularly as incentives are expected to rise.
Of the local property companies rated by Moody’s, only Scentre (A2 negative) and Vicinity (A2 negative) have negative rating outlooks, with 52 per cent of Vicinity’s shopping centres by asset value being exposed to Victoria.
Moody’s said whether the two REITs can maintain their current ratings given the new lockdowns will depend on their ability to maintain lease structures broadly on pre-COVID terms and conditions, underpinning stable cash flows and assured annual rent increases.
Lease negotiations
To date, around 60-70% of lease negotiations have been completed. Rental assistance provided has been in the form of short-term variations to the leases.
However, the weak retail environment presents a longer-term risk that a larger proportion of leases will shift to a turnover rent basis, as seen in other developed markets.
Meanwhile, all four pure-retail REITs — Scentre, Vicinity, SCA Property Group and Charter Hall Retail REIT — will see retail property values decline, Moody’s said.
But it said they entered the downturn with balance-sheet buffers to withstand an increase in gearing. On average, property values would need to fall by a significant 34 per cent from pre-pandemic levels for the four retail REITs to breach gearing thresholds, and 48% for a breach in covenant thresholds.
Moody’s said non-discretionary retail-focused REITs were more resilient, while diversified REITs also benefit from their exposure to the more favourable property sub-segments.
Credit agency Fitch Ratings on Monday also called out the weak performance of the retail sector as hurting Australian retail REITs and warned against expecting a meaningful industry improvement in the second half.
Fitch says the poor performance of retail property portfolios was driven by the impact of rental relief provided to tenants in the June quarter, as well as a decline in valuations due to expectations that structural changes in the sector, including the shift to online retailing, have accelerated.
“We expect some recovery in the second half as social distancing measures are relaxed and visitations improve, although this remains vulnerable to stricter social distancing curbs that may be implemented to combat localised outbreaks,” Fitch said.
