GPT malls take $500m writedown hit

Property group GPT has crystallised some of the retail sector’s pandemic turmoil, writing down the value of its mall portfolio by $500 million.

Darwin’s Casuarina Square has been GPT’s hardest hit mall. Picture: Katrina Bridgeford

Shopping centre values have begun their long descent, with the GPT Group on Tuesday announcing a near $500m hit to its portfolio and other listed mall owners expected to follow suit in coming weeks, wiping billions off their holdings ahead of end of financial year valuations.

The move came as the industry faces up to the unprecedented crisis prompted by the coronavirus lockdown which has brought forward the crunch that centres were facing over the next decade into a period of just months.

While investors welcomed the clarity and scope of revaluations in GPT’s announcement, driving its shares up by 7.53 per cent, concerns about sliding shopping centre values prompted Vicinity Centres to launch a $1.4bn equity raising last week, and Morgan Stanley analysts tipped that rival mall owners, Scentre, operator of the local Westfield empire, and Stockland will also follow suit.

The picture remains grim on the ground, despite major land shopping centre owners striking more than 5,000 deals with small businesses under the Morrison government’s commercial tenancy code of conduct.

Leasewise managing director Ange Kondos said talks with landlords were underway after they had digested “abhorrent” rental figures for April and saw a slight recovery in May.

Major landlords had interpreted the leasing code for small tenants hit by the fallout from the virus in a fairly standard fashion, offering 50 per cent rent relief and 50 per cent deferral while shops were closed, he said.

Mr Kondos is advising tenants to reject these terms, saying a “cookie cutter” approach would not work and landlords were after “small mum and dad retailers … they seem to be the soft targets”.

He advises waiting until the stimulus has passed through the system. “There has been a sugar hit as we come out of lockdown and we think this will peter away in July and August,” he said.

Shopping centre owners are also dealing with a series of administrations and major retail chains, including Solomon Lew’s Premier Investments refusing to pay rent when their stores were closed and announcing strategies to permanently slash their spaces.

GPT had its seven directly held retail assets independently valued, cutting their book value by $476.7m, or about 8.8 per cent against their value at the end of last December.

Hardest hit was Darwin‘s Casuarina Square, in which GPT’s half share was off by $41.2m or 16.6 per cent. This was followed by the company’s fully owned Charleston Square in Lake Macquarie, NSW, that was down by $139.2m, a 13.9 per cent drop.

Melbourne’s Highpoint Shopping Centre, in which GPT has a direct 16.7 per cent interest, was down by 13.6 per cent, indicating that even super regional malls will be hit by the impact of the pandemic.

It was still held on a capitalisation rate, a measure used by property valuers, of 4.5 per cent, a lift of 25 basis points, and will be nervously watched by other mall owners who had bought or held properties at levels of about 4 per cent.

Values of Rouse Hill Town Centre, Sunshine Plaza and Westfield Penrith, as well as Melbourne Central, were also lowered.

With transactional markets essentially shut down for major shopping centre transactions while the virus rages globally, experts predict more falls and capitalisation rates are tipped to blow out.

Many prospective buyers are global institutions dealing with severe problems in their own markets, where shopping centres are in even more dire straits.

Local shopping centre majors Vicinity Centres and the Scentre Group, owner of the local Westfield empire, have yet to disclose the latest valuations on their centres, though similar falls are expected.

Unlisted funds are taking a hit, with GPT’s own shopping centre fund down heavily and Lendlease’s APPF Retail, that is under pressure to meet $2bn redemptions, among the hardest hit. The AMP Capital Shopping Centre Fund also had a 3.5 per cent fall across its portfolio, since the April valuations, which came in addition to the 9.2 per cent fall it booked in that month.

The worst declines appear concentrated on centres that are exposed to discretionary spending and luxury and fashion categories, as well as services crimped by the virus.

GPT chief executive Bob Johnston said the revaluations reflected the independent valuers’ assessment of the effects that COVID-19 and the subsequent social restrictions had on the company’s retail assets.

“This has generally been reflected in lower market rental growth rates, increased vacancy and abatement allowances and some softening in investment metrics,” he said.

Mr Johnston pointed to the significant increase in activity in recent weeks in centres as restrictions have been eased, with about 90 per cent of stores open and foot traffic at about 85 per cent of the same time last year.

GPT blamed the effects of the pandemic and the application of the leasing code to push back the declaration of its distributions to coincide with the release of its financial results in February and August each year. It also trimmed its distribution payout policy to align with free cashflow but is yet to release its earnings guidance.