Potential headwinds for retail property landlords

Potential headwinds for retail property landlords

7 April, 2017

An emerging consensus that the global property market has passed its peak could signal trouble for listed retail property landlords in Australia, reports The Australian Financial Review.

The warning comes from Citi analysts Adrian Dark and Suraj Nebhani after they investigated the stock prices of Australian real estate investment trusts.

“A potential reversal in Australian cap rates, a rising bond yield environment, and firmer valuations than US peers suggest that A-REIT share prices could face headwinds,” the analysts wrote in a client note this month.

“On the other hand, if Australia decouples, with cap rates declining further, this would be positive for AREIT performance,” they added.

Major listed retail landlords in Australia have already caught a dose of US contagion, where mall owners are under attack by hedge funds taking short positions on commercial property debt. These circumstances have raised questions about the viability of some shopping centres.

Westfield, with its offshore portfolio, Scentre, which operates Westfield malls locally, and Vicinity Centres have all been hit because of those US fears.

Mall owners are busy investing into redevelopment and increasing the vibrancy of their offer in a bid to counter shifting consumption patterns and the threat of online retailers.

“Structural headwinds facing retail landlords continue to drive negative sentiment toward the sector,” the Citi analysts wrote.

“We see potential for a de-rating if sentiment remains weak or fundamentals soften,” they added.

On a more positive note, the Citi analysts said that some CEOs were “pushing back on the ‘death of the mall’ narrative, arguing that reality is much better than perception.”

In contrast, industrial property owner Goodman Group—which has a portfolio local and offshore facilities, including in the US—is the preferred exposure for investors.

“Ecommerce continues to provide a powerful undercurrent, with consumption trends a solid tailwind,” the Citi analysts wrote.

[Read more: The Age explains why retail property landlords are having to work harder for the retail dollar.]