This article is from the Australian Property Journal archive
RETAIL property transactions declined in the March quarter, according to latest research.
According to The Data App, the value and volume of shopping centres transactions was the lowest for over two years.
Director Rob Ellis said in spite of the seasonally-weak sales, which is typical of the first three months of the year, this will be a high-water mark in comparison to the forthcoming June and September quarter, as the effects of covid-19 start to impact listings, confidence and sales in the market.
“Cap rates trended higher in the first quarter of 2020, thereby partly revering some of the decline recorded through the course of 2019.
“TDA calculate cap rates for commercial retail property assets were 6.54% in the March quarter; a rise of 61 basis points from the December quarter and 30 basis points down on a year earlier,”
TDA found the price paid per sqm, while it was marginally higher during the quarter, has started to trend down and is now at its lowest level since the March quarter of 2017.
“The commercial retail sector had been increasingly restrained by weak economic demand forces, namely negligible real income growth, restrained borrowing and the growing presence of on-line shopping.
“If this was not enough, the coronavirus has not only resulted in income and employment imploding, thereby hitting retail demand further (with the exception of food and household spending) but has led to numerous retail outlets either temporarily or permanently shutting.
“So, despite compelling valuations, particularly compared to other commercial assets, with the impact of the coronavirus continuing to unfold, applying values to retail assets is a difficult, if not impossible, task. However, place in perspective, listed larger retail stocks are showing implied valuation declines of circa 40%,”
Looking ahead, Ellis said the confluence of increased vacancy through store closures and insolvencies, potentially structural behaviour changes following covid-19 and a weaker Australian dollar (resulting in higher costs) for retailers, is likely to further add pressure to underlying income for shopping centres.
This week after much uncertainty, the peak bodies representing shopping centre landlords and retailers agreed to a code of conduct and temporary moratorium on eviction of tenants who are unable to pay rent.
They met after Prime Minister Scott Morrison backed the ban on evictions and urged tenants and landlords to sit down and resolve their issues during this crisis.
Ellis said the impact covid-19 combined with higher funding costs and risk premium for investors, is likely to see a double impact on shopping centre values of higher cap rates applied to lower income.
Earlier this week ratings agency Moody’s Moody’s Investors Service said the impact from covid-19 on retail focussed AREITS will be moderated by measures announced by the industry.
“The impact from the coronavirus outbreak on retail-focused AREITs will be moderated by measures announced today to support the financial viability of shopping centre tenants such as restaurants, cafes and others small businesses,” vice president Saranga Ranasinghe said.
“The Australian Banking Association has announced that it will extend repayment deferrals to businesses with loans up to AUD10 million. Banks have also agreed not to enforce terms for non-financial breaches of loan contracts, such as changes in valuations, during the six-month deferral period.
“However, retail-focused AREITs remain exposed to the risk that demand for retail space could remain subdued even once the virus is contained, as coronavirus-related disruptions will have weakened tenants’ credit profiles.” Ranasinghe said.
