Average retail rents at shopping centre properties owned by listed mall giants Scentre Group and Vicinity Centres will be clipped by 15 to 18% compared to pre-COVID levels as stores close, consumers continue to shift to online shopping and the “new normal” of social distancing measures takes hold, according to analysis from Morgan Stanley.
The report suggests that rental income could decline by 15.5 to 17% for Scentre properties and by 16.3 to 17.5% for Vicinity properties, with six basis points of the decline represented by higher vacancy rates in the “specialty rents” category typically occupied by fashion retailers.
A further 1% will be shaved off by department stores like Myer and David Jones and discount department stores like Target, Big W and Kmart reducing the amount of square footage they lease to improve margins.
“Even before COVID-19, Jones Lang LaSalle had forecasted that over the next five years, around 700,000 sqm of shopping mall space could become available as a result of department stores and discount department stores giving up space,” the report said.
“Our concern is that after COVID-19, retailers will evaluate their networks with even more scrutiny, potentially bringing forward store closure plans.
“If all department stores and discount department stores chains rationalise their footprints concurrently, there could be a flood of vacant retail space in Australia.”
The combined impact of higher specialty rent vacancies and an assumed 10 per cent decline in department store floor space could reduce Scentre’s annual rent per square metre from $1900 to $1759 and Vicinity’s from $890 to $821, the report said.
The second most deleterious factor to shopping mall income is the increased adoption of online shopping, which the report said could knock 5 per cent off each company’s rental income.
“We estimate that the COVID-19 lockdown in March-May has brought forward online retail penetration by three years,” the report said, noting that online shopping now represented around 10% of all retail trade.
“All categories of retailers – including fashion, electronics, department stores, footwear, etc – reported huge increases in online sales during the lockdown.
If we assume that for the tenants whose products are substitutable via online sales … we see a channel mix shift of 10 percentage points from in-store to online, we estimate this will have a negative impact of 5% on Scentre and Vicinity’s annual rental income.”
The report also noted that social distancing measures in gyms and cinemas could reduce rental income by 2 per cent due across both companies, while social distancing measures in food courts and restaurants could reduce Vicinity’s income by 1.3 to 2.5% and Scentre’s by 1.5 to 3%.
“Food and beverage makes up around 12% of Scentre’s rental income (and) 10 per cent of Vicinity’s,” the report said.
“If food court seating and cafe seating have to be cut back by 50 to 60% for an extended period of time, then it is possible that landlords will have to provide constant rent relief until the restrictions are lifted.
“After all, even when factoring in takeaway sales and non-sit-down sales, our channel checks suggest that operators are losing 25 to 50 per cent of customers as a result of a circa 60% shrinkage in sit-down capacity.”
As a result of the findings of the report, Morgan Stanley moved their target price for Scentre Group from $2.90 to $2.66 a share and their target price for Vicinity Centres from $1.65 to $1.28 a share, expressing a preference for Scentre due to the group’s portfolio being located in higher-income areas and comparatively lesser pressure to expand capital on redevelopments and refurbishments.
Scentre Group closed up by 0.47% at $2.16 a share and Vicinity Centres closed at $1.375, up 3% a share.
This article originally appeared on www.theaustralian.com.au/property.
