Insights

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.”

Man who said buy Kogan shares at $3.63 says buy these 3 ASX stocks now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

In this FREE STOCK REPORT, Scott just revealed what he believes are the 3 ASX stocks for the post COVID world that investors should buy right now while they still can. These stocks are trading at dirt-cheap prices and Scott thinks these could really go gangbusters as we move into ‘the new normal’.

Find out the names of our 3 Post COVID Stocks – For FREE!

*Returns as of 6/8/2020

More reading

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.

Trade The World Anywhere & Anytime!

Mobile app platform with over 50,000 global listed securities across 12 markets (over 70% global market capitalisation), right from your Android or iOS device.

Integrated with exclusive trading idea and investment analysis tools to help you find actionable insight on virtually every financial instrument across our 12 global markets, to help you optimise your trading strategies.

Refer Your Friends

Tell your friends about Monex and gift them FREE access to our trading tools.

We respect your privacy and will only send this one email notification to your friends. 

Share With Your Friends

Share on facebook
Share on twitter
Share on linkedin

Monex Trading Tools Access and Usage Terms

The Monex Trading Tools (referred to as ‘tools’ hereafter) are available to you inside your client portal;


To activate access to the tools, you must have a verified and approved trading account and have made a deposit of at least AUD $1000.


An active and funded account with a positive trading balance is required to continue to have access to the tools;


Although the tools are available to you indefinitely, Monex Securities may at it’s discretion disable access to the tools in the future;


Monex securities reserves the right to change these terms and conditions from time to time, as it sees fit, without notice.

Important Notice
iOS & Android App - 12 International Markets & Over 70% Global Market Cap. $0 Brokerage On US Trades. Click Here!