Melbourne malls crunched by lockdown worries as shops shuttered

Morgan Stanley has warned of a lockdown hit on shopping mall owners, including Chadstone owner Vicinity Centres.

Bourke Street Mall in central Melbourne is quiet during the second week of lockdown. Picture: NCA NewsWire/Andrew Henshaw

Big mall owners and property developers are in the firing line from the Victorian lockdown with Morgan Stanley warning that the owners of the landmark Chadstone Shopping Centre in Melbourne could be hit.

The stockbroker estimated on Monday, before 11 new cases were announced, that the listed Vicinity Centres could take a hit of about 5 per cent to its earnings.

The company owns the shopping centre alongside magnate John Gandel, and has already been hit in the past by lockdowns and has provided support to struggling tenants.

Rival owner the Scentre Group, which owns the local Westfield empire, has a lower exposure to Victoria.

Tenants are still recovering from Melbourne’s extended lockdown last year and even residential property prices in the city have been playing catch-up with the rest of the country after they got off to a slow start due to last year’s lockdowns.

The outbreaks could also hit some development projects with a case attending the Probuild site at 100 Queen Street. That property is being overhauled by the GPT Wholesale Office Fund and has already won tenant commitments from the likes of buy now pay later company Afterpay.

GPT confirmed that the site was closed and said it had undergone a comprehensive deep clean in preparation for a return to work.

While construction sites remain open, the lockdown also limits home inspections to online and drove the fall off in auction volumes last weekend, although there was only a slight fall off in the clearance rate.

Morgan Stanley analysts said the current Victorian lockdown could have a $26m impact on Vicinity’s Funds From Operations this financial year.

They said that with so many difficult-to-forecast moving parts to earnings they left their forecast of $531m unchanged.

Vicinity has not provided fiscal 2021 earnings guidance, so the current 14-day lockdown of Melbourne is unlikely going to result in any official downgrade.

Victoria makes up about 45 per cent of Vicinity’s rent-roll, which works out to $850m a year and Morgan Stanley said that any rental relief provided by the company to its Victorian tenants will be assessed on a case-by-case basis.

But for now, it is assumed that some form of rent abatements will be implemented until the end of June given the situation may not “snap back” to pre-lockdown straight away.

A company spokesman said that the impact of restrictions was softened by Vicinity’s diverse portfolio of centres and strategic mix of retailers including supermarkets and pharmacies.

“Vicinity has also continued to support retailers with our newly implemented click and collect service,” he said as the company’s shares bumped up half a cent to close at $1.64.

Moody’s Investors Service upgraded Vicinity’s outlook from negative to stable and also affirmed the company’s A2 rating.

“The change in outlook to stable reflects our expectation that Vicinity’s credit profile will remain within the parameters set for the A2 rating over the next 12-18 months. This is driven by the initiatives carried out by Vicinity to strengthen its balance sheet and liquidity position to address uncertainties stemming from the coronavirus pandemic and our expectation for operating conditions to stabilise over the coming months,” Moody’s vice-president Saranga Ranasinghe said.

Moody’s said that despite challenges from the coronavirus pandemic, the operating environment for retail trusts in Australia had been more favourable than in most other developed economies.

“The REIT’s credit profile is supported by its large scale, solid operating track record and ownership of destination retail assets that include Chadstone, Australia’s largest shopping centre,” Moody’s said.