This article is from the Australian Property Journal archive
COMMERCIAL retail property transactions slowed to a trickle in the June quarter to their lowest level in eight years, while recent cap rate compression has been reversed.
According to The Data App, cap rates for commercial retail property assets were 6.42% in the June quarter. This was virtually the same as the March quarter, but 11 basis points higher than a year earlier. They are at their highest level since then.
“Thin volumes couples with the difficulty of making accurate valuations, when rents are highly uncertain, saw cap rates again edge higher in the June quarter,” The Data App director, Rob Ellis said.
“Consequently, the cap rate compression posted over the previous 12 months has now been clawed back.”
Both the value and volume of shopping centres transacted, in trend terms, are now at their lowest level for eight years. Prices paid per sqm are now 17% lower than one year ago.
“Even before COVID-19 came along, the retail sector faced a number of headwinds. Very modest real income growth, low levels of borrowing and the continual encroachment of internet shopping were all contributing to weak retail demand,” Ellis said.
“The onset of COVID-19 has increased the penetration of interest shopping while, by all accounts, with taxes set to rise against the background of a relatively high unemployment rate, real income growth will be weak at best.
“Consequently, the fundamentals underpinning retail spending look set to deteriorate further.” Ellis said.
Major landlords have been feeling the pinch. One month ago, Vicinity Centres launched a $1.4 billion raising to strengthen its balance sheet, predicting the 19 pandemic will slash between $1.8 billion to $2.1 billion from the value of its property portfolio. GPT Group’s recent asset revaluations resulted in the book value of GPT Wholesale Shopping Centre Fund falling by $511 million, or 11%.
Scentre announced it would not pay an interim distribution, looking to pad out its finances.
Ellis said the irrespective of compelling valuations, the demand backdrop, an increased vacancy rate due to store closures and insolvencies, as well as potential structural behaviour changes in the wake of COVID-19, are likely to further add pressure to underlying income for shopping centres.
“Combined with higher funding costs and higher risk premia for investors, the result is likely to be a double impact on shopping centre values of higher cap rates applied to lower income.”
Retailers and landlords, still working under the National Cabinet’s Code of Conduct for rental agreements, are at odds as to how to redraw lease terms going forward.
More than 150 rent relief deals are being reached per day between shopping centre owners and small to medium enterprise tenants, covering 45% of retailers to date and more are working through discussions, according to national industry group the Shopping Centre Council of Australia.