COVID-19 permanently wrecked these shares, report warns

Ratings agency report lists all the headwinds for this subsector, and it makes for grim reading.
The post COVID-19 permanently wrecked these shares, report warns appeared first on The Motley Fool Australia. –

With multiple vaccines looming and low interest rates, many industries are looking good for a recovery out of the COVID-19 recession.

But one credit agency worries that the retail real estate investment trust (REIT) subsector has been permanently damaged.

“The fallout from COVID-19 will linger beyond lockdowns for rated retail REITs around the world,” said S&P Global Ratings credit analyst Rhys Corry. 

“For Australian and New Zealand retail landlords, revenues plunged over the past few months as stores were shuttered and tenants were unwilling or unable to pay their scheduled rents.”

On the ASX, the most prominent retail REITs include Scentre Group (ASX: SCG), Vicinity Centres (ASX: VCX) and Shopping Cntrs Austrls Prprty Gp Re Ltd (ASX: SCP).

While REIT landlords executed capital raisings, cut dividends and slashed expenditure to get through the toughest periods last year, the world has changed for the worse for this subsector.

“The structural pain will prolong as faster adoption of e-commerce and changing consumption patterns continue to buffet the sector,” reported the analyst agency.

“S&P Global Ratings expects the fallout from the pandemic to extend well beyond lower rental collections over the next few months.”

Australia’s now tasted online shopping and it can’t go back

Online shopping has been a looming headwind for many years but the transition to it had been gradual – until the coronavirus hit in 2020.

S&P Global Ratings’ reported a stunning 200,000 Australian households shopped online for the very first time just in the month of April 2020.

“COVID-19 has driven previously reluctant consumers online and encouraged online take-up at a much faster rate than we have witnessed in the past,” S&P Global Ratings reported.

“We believe that much of this online shift represents a more permanent change in consumption trends.”

Many retailers were caught out last year not having a sufficient virtual presence. Their scramble to remediate this had a flow-on impact to their ability to pay rent.

“Given many retailers were already struggling financially leading into the pandemic, the additional investment required in online capability has strained their already stretched balanced sheets,” read the S&P Global Ratings report.

And in Australia, the level of online retail activity still lags behind other comparable nations – leaving plenty of more room for growth.

“The level of e-commerce sales as a proportion of in-store retail sales remains well below markets such as China, the UK, and the US. However, the COVID-19 pandemic has fast tracked growth in online sales, intensifying pressure on retail landlords.”

Sales-linked rent agreements

The struggles in the retail sector have seen some tenants request sales-based rental contracts.

Traditionally in Australia, commercial rent has been a fixed amount regardless of the fortunes of the tenant business.

But the coronavirus pandemic has pushed tenants to call for the sales-based model that’s used in some overseas markets. This would mean landlords receive less in bad times, but also a bit more in good times.

S&P Global Ratings warned if this campaign was successful, it would have negative impacts on retail REITs.

“Fundamentally, it would likely increase the cost of capital and worsen the debt capacity and credit quality of our rated REITs.”

The agency reported Australian REITs have so far resisted the calls for sales-based rents. But if one of them caves, the whole industry could be impacted irreparably.

“Risks remain that landlords of lower-quality shopping centres could succumb to tenant demands and allow sales-based leasing deals to maintain occupancy levels. This could reverberate through the sector, triggering competition among landlords for tenants.”

Big international chains are no longer reliable tenants

The S&P Global Ratings report also noted big “anchor” tenants are no longer reliable to fill vast amounts of shopping mall space.

“These tenants, including retailers such as UNIQLO, H&M, and Zara, had previously been eager to fill space, underpinning centre expansions,” the report read.

“Since the pandemic, however, Zara and H&M announced the permanent closure of a number of stores in their global store network (1,200 stores and 250 stores, respectively) as they both turn their attention to e-commerce. In October 2020, H&M launched its dedicated Australian online store and loyalty program, which offers free delivery.”

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Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post COVID-19 permanently wrecked these shares, report warns appeared first on The Motley Fool Australia.

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