Online sales and retail collapses put pressure on shopping centre landlords: BIS Shrapnel

The growth in online shopping as well as the high Australian dollar is likely to put pressure on shopping centre landlords, with GPT and Westfield sustaining low vacancy rates and above inflation rental growth, according to a new report by Moody’s.

The report says GPT is the more heavily exposed of the two shopping centre landlords, with 61% of its property assets in the retail space, while Westfield is less exposed with 40% of its property assets in retail.

Westfield most recent project was its flagship Westfield Sydney project in the Sydney CBD, while GPT Group is currently expanding the Highpoint Shopping Centre in the western Melbourne suburb of Maribyrnong in a $300 million project that will be completed next year.

Moody’s rates Westfield Group as A2 with a negative outlook, still a high investment grade rating signifying high quality and very low credit risk.

GPT Group is rated A3 with a stable outlook – an upper-medium grade rating with low credit risk.

Westfield will release its interim results on August 16 while GPT will put out full year results on August 27.

Despite the online concerns, Moody’s also says that GPT and Westfield are better positioned than other landlords and A-REITs by virtue of the quality of their portfolios and their heavy weighting to regional centres.

Moody’s expects regional centres to show greater resilience than sub-regional and neighbourhood centres.

“Retail centres that provide a broad range of offerings, including entertainment, restaurants and services, are more likely to be able to continue to attract tenants than smaller and more narrowly defined centres.”

“Ninety-five percent of GPT’s centres are classified as regional and Westfield has a similar profile.”

“This contrasts favourably with, for example, Charter Hall Retail REIT (unrated), all of whose properties are classified as sub-regional, neighbourhood, freestanding or household.”

Moody’s’ concerns about the threat of online retailing on bricks and mortar follow recent research by PwC/Frost & Sullivan showing that more than half of all Australians now shop online, with total online spend growing annually at 14.1%, and amounting to 5.5% of total retail sales in 2011, up from 4.9% in 2010.

PwC is forecasting online spending of $26.9 billion annually by 2016, up from $13.6 billion in 2011.

According to Moody’s “this growth in online shopping has negative credit implications for A-REITs with retail exposure”.

“One consequence of the structural change underway is that the long-standing environment of both minimal vacancies and above consumer price index (CPI) rent increases is becoming increasingly unsustainable,” says Maurice O’Connell, Moody’s analyst and author of the report.

O’Connell says retail tenants are operating within a “poor retail environment where sales growth, excluding food, over the past few years has been below 1% per annum”.

As a consequence it is becoming harder for stores to absorb structured rent increases “typically based around the CPI as overall specialty rent as a percentage of specialty store revenue is at historic highs”.

BIS Shrapnel chief economist Frank Gelber also noted the challenges faced by retail landlords as part of a presentation to the REIV Commercial & Industrial Economic Forecast Luncheon in Melbourne last week.

Gelber said the “golden age” of retailing in the late 1990s and early 2000s would not return, but reassured retail landlords that “people would still be shopping in stores in five years’ time”.

He notes that over the last few years, consumers have increasingly directed their spending overseas (in-store when on holiday overseas and online, at overseas-based websites) as well as towards non-retail goods and services, such as travel and health.

“They also increased their rate of saving, although this has now levelled off – albeit at a fairly high level,” he says.

Gelber says gaps between retail turnover (which is a measure of spending in Australia only, and therefore does not include Australians spending overseas) and total household spending widened through 2010 and 2011.

While it now appears to be closing, BIS Shrapnel does not expect it to close entirely for a few years at least due to the likelihood of a sustained high Australian dollar, together with shifts in the ways consumers allocate their spending.

“Retail building is subdued at present, with new projects held in check by funding difficulties as well as the challenges of leasing shops in the current environment of weak business confidence.

“Commencements peaked at over $6 billion in the year to September 2008 and are currently running at a little over $4 billion.”

“The rollout of hardware superstores by Bunnings and Masters has helped to prevent a greater collapse in activity.”

“However, within a couple of years we are likely to see substantially higher levels of building. Over the next five years as a whole, retail commencements are predicted to average $4.9 billion per annum, marginally higher than over the last five years,” he says.

This article first appeared on Property Observer.


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