Mall values at risk as UBS warns rents could drop 20pc

The country’s biggest shopping centres are suffering sharp falls in values, amid predictions rents paid by retailers could fall 20pc.

A largely empty Chadstone mall during the Melbourne lockdown. Picture: Alex Coppel.

Shopping centre owners including Scentre Group, operator of the local Westfield empire, and Vicinity Centres, co-owner of Chadstone, could suffer further falls in rentals and asset values, according to a report by investment bank UBS.

UBS analysts Grant McCasker and Tom Bodor said many of the structural retail headwinds were already factored into stock prices, but that substantial risks remained after a tough reporting season.

“While weakness was expected in retail, the extent of abatements, low rent collection and negative operating leverage surprised on the downside and the outlook remains challenged, with large format retail bucking the trend,” UBS said.

The analysts said retail was continuing to see tenant pressures and requests for rent relief from smaller tenants eclipsing a lack of longer-term leasing deals. “We expect rents to structurally rebase 20 per cent lower, impacting valuations,” the property team said.

The risk in the short term was the “reopening trade”, although they said this was likely to be short lived, in particular, for retail.

There were also concerns about difficulties in collecting rent, with major landlords like Solomon Lew’s Premier Investments refusing to pay for when stores were closed during the pandemic and looking for longer-term reforms.

“With minimal long-term leasing deals being executed, short-term cash flows will remain under pressure and a second COVID-19 wave adds to the uncertainty,” they said. The analysts cited the impact of COVID-19 on the ability of landlords to extract money from hard-pressed tenants.

Cash collection rates were below expectations in the June quarter while the July collection rates appear to show a substantial improvement. Scentre’s (82 per cent) and GPT’s (64 per cent) calculation methodology masked the actual collections against monthly billings, as it included prior month rental payments received late, UBS said.

In total there were $592m of rent waivers, abatements and provisions that amounted to about 30 per cent of income and $270m on unpaid rent was included in funds from operations. Only about a quarter of amounts provisioned have agreement finalised.

UBS said asset valuations declined by 11 per cent for malls and “bigger“ was not necessarily better. CBD assets were surprisingly outperforming, despite a lack of foot traffic. But pre-development assets were under pressure.

The analysts expect increased scrutiny on occupancy over the next nine months and say unprecedented levels of leasing are still required, with Vicinity needing to secure a quarter of income over the next 12 months.

Investors initially got excited about the strong July cash collection rates, with Scentre collecting 82 per cent versus the June quarter. However this largely reflected a catch up of prior billings, not an improvement in the monthly run rate.

A survey of Property Council of Australia members found that only a quarter of the amount provisioned for all COVID-19 rent relief from April 1 to September 30 had so far been finalised through agreements with tenants, reflecting state and territory delays in setting up the codes and their complexity.

Vicinity has 24 per cent of its portfolio either expiring or in holdover over the next 12 months. The company said occupancy will decline to less than 95 per cent reflecting CBD assets, tourism exposed assets, Melbourne concentration and assets previously under pre-development works.

Scentre hope to maintain occupancy at current levels. Roughly 7-8 per cent of Scentre specialty leases expire in the next 12 months and holdovers are currently sitting at 6 per cent of gross leasable area.

UBS said while the market is pricing in substantial devaluations and considerably more than witnessed in the June quarter, it had a substantially more conservative view on rent growth than the valuations imply.

UBS called out falls in values of big malls including Chadstone (down 7 per cent), Westfield Bondi and Chermside (down 9 per cent) and Westfield Fountain Gate (down 16 per cent down).

CBD assets valuations are outperforming despite disappointing foot traffic with Melbourne Central, ahead of stage four impacts, and Westfield Sydney, suffering minimal declines.

Assets in pre-development phase suffered the most including Vicinity’s mall at Bankstown which dropped by 17 per cent, while its Chatswood Chase was down 15 per cent. Scentre’s Knox was off by 26 per cent and Westfield East Gardens fell 17 per cent.

UBS said questions remain over long term growth for malls. However, it said expectations are sufficiently low as the listed market is pricing in asset value declines of 35 per cent for malls.