If you’ve been to your local shopping centre lately, well, I’m surprised. Deemed essential services, they remain open but have the feeling of a ghost town. Footfall, as visits are known in the trade, has been in freefall. Supermarkets are buzzing but discretionary retailers are closing their doors, despite no legal obligation to do so.
Footfall in freefall
When revenue is next to nothing and no date has been set for a return to normal trading, whatever that looks like, slashing costs is now the only option. Staff were the first to go, with Flight Centre announcing the closure of half its global stores with the loss of 6,000 jobs worldwide1.
Other retailers, including Premier Investments, owners of Jay Jays, Smiggle and Just Jeans, has taken the “nuclear option” in the words of the Australian Financial Review, planning to stop paying rent altogether2.
While tenants make the case for rent holidays and reductions, John Gandel, who owns half of Chadstone, Australia’s largest shopping centre, is reminding them that rent is “a legal obligation”3. It’s a measure of how much has changed in a few short months that this point needs to be made in the first place.
Footfall isn’t the only thing to have collapsed. Through March, Westfield owner Scentre’s share price fell 54.8%, while Vicinity Centres the owner of the other half of Chadstone fell 52.1%. The REIT sector, a traditional safe haven, now looks anything but. The S&P/ASX300 AREIT index declined 35.2%, far more than the ASX300 equities index which fell 20.8% in the most severe market sell off since 1987. While markets will remain volatile for some time, it’s worth noting Scentre is up 27.5% and Vicinity 27.3% to 16th of April as investors begin to recognise the stocks are themselves on sale and that worst case scenarios look less likely as we progress through the COVID-19 crisis!
The concerns expressed in such falls is more than tenants reneging on their obligations over the next few months. It also includes the fear of dilutive capital raisings, a feature of the global financial crisis (GFC), and the uncertainty over what effects an extended lockdown might have on the role shopping centres play in a modern, consumption-led society.
Maybe it will accelerate the growth of online retail? Maybe in future people will be reluctant to pack into flagship centres like Westfield Sydney City and Chadstone on a Sunday? And maybe those rent reductions now being negotiated will become permanent rather than temporary?
These are all concerns one could not have imagined three months ago. At a time when uncertainty is already high, retail has become a byword for it. The current share prices of Australian REITs, most of which are trading at significant discounts to net tangible asset values, tell us as much.
Looking beyond the immediate chaos
We could panic, like many investors did. Or we could look at the facts and try and see past the chaos. The latter is our preferred option.
In response to the uncertainty, bond yields rose significantly in March (but have since stabilised around pre-lock down levels) which didn’t help the already under pressure AREIT sector. Add to this concerns around the prospect of dilutive capital raisings. AREITs appeared to have little going for them hence the indiscriminant selling that ensued.
Capital raisings can’t be ruled out (we have seen two already, however both were at <10% discount to NTA and were viewed as opportunistic balance sheet fortification) but there are a few salient facts that suggest these fears are overdone, more a function of historical experience than current reality.
Debt is lower, more diversified and longer in tenure
AREIT gearing is now much lower than it was at the time of the GFC. In 2008, debt levels were around twice as high with funding sourced mainly from domestic banks using short duration loans. This was not prudent, as events subsequently proved.
JP Morgan research shows how REIT sector gearing has declined since the GFC (see Chart 1), to the point where it is now lower than the average of the last two decades.
