This article is from the Australian Property Journal archive
STOCKLAND and Vicinity Centres will come under pressure due to their higher exposure to underperforming shopping centres, while Scentre, GPT and Mirvac are better equipped to face challenges in the retail environment, according to Moody’s.
Moody’s latest report, Higher quality mall portfolios are better equipped to face challenges in the retail sector, authored by Matthew Moore and Yuriy Obukh, said the quality of five Australian real estate investment trusts (AREITs) with retail exposure will likely diverge in the coming three to five years amid increased competition from online retailers, consumers’ changing preferences, and urbanization.
Moody’s associate analyst Yuriy Obukh said in the absence of recycling initiatives, Vicinity and Stockland will see portfolio quality weaken because of their higher exposure to underperforming midsize shopping malls.
The report found Vicinity and Stockland have the highest exposure to sub-regional shopping malls (gross lettable area of 10,000 – 30,000 sqm) at 22% and 30% of their total retail portfolios by asset value, respectively. Their productivity is lower than that of Scentre, GPT and Mirvac, which have far lower exposure to sub-regional malls.
“We expect their retail comparable NOI growth to remain below the others in the peer group, with Stockland at 2.2%-2.4% and Vicinity at 1.4%-1.6% during the coming 12-18 months.
“Vicinity and Stockland are working to improve asset quality, but this will take time. Their plans to sell weaker performing assets and to develop residential, hotel and office space at existing malls are likely to improve their portfolio quality. However, we believe that they are unlikely to make step changes in their portfolio quality as it will take time to market assets and find appropriate buyers at this point in the property cycle,” the report said.
Furthermore, the report said Vicinity and Stockland have the highest exposure to Western Australia, at around 14% and 6% by retail portfolio asset value, respectively. Macroeconomic conditions there are weaker than in the rest of Australia because of the impact of lower commodity prices and mining investment in 2015-16.
“Of the five A-REITs covered in this report, these two A-REITs also account for the largest share of the bottom 25% of the shopping malls, by specialty sales per sqm,” the report said.
On the other hand, Obukh said the portfolios of Scentre, GPT and Mirvac are skewed towards higher quality centres in Sydney, Melbourne and Brisbane, where macroeconomic conditions and retail productivity are stronger than in other parts of Australia.
“We expect year-on-year retail comparable net operating income (NOI) growth to be 3.0%-3.5% for Mirvac during the coming 12-18 months, and 2.5%-3.0% for GPT and Scentre,”
Moody’s said these malls also have better ability to raise rents and find tenants for vacated space.
“We expect A-REITs to continue expanding their retail services and food catering categories as consumers increasingly look to do more than shop at malls and seek a wider selection of dining options. Mirvac and GPT posted the strongest results in these categories, which supports their credit quality as this led to stronger overall moving annual turnover growth (MAT, sales growth for a 12-month period calculated on a monthly rolling basis). Mirvac averaged 4.9% MAT on a comparable basis over the last 3 years, while GPT averaged 3.2%.”
Despite these challenges, Obukh said solid economic conditions relative to other developed countries, combined with stringent planning and zoning restrictions that limit new shopping mall developments, will continue to generally support the AREITs’ shopping mall portfolios and credit quality.
“A number of macroeconomic measures are stronger in Australia than in other developed countries: population growth of 1.6% versus the 0.6% average for Organisation for Economic Co-operation and Development (OECD) countries; a higher working-age employment rate of around 66% versus the 61% OECD average; and higher levels of urbanization with 70% of the population concentrated around urban centers, versus the 48% OECD average.” The report said.
Australian Property Journal
