Shopping centre landlords facing massive hit to earnings and credit quality: S&P Global Ratings

Credit agency warns of hit to earnings and credit quality of Australian REITs with erosion over the next year.

The pandemic may also hasten a structural shift toward e-commerce and remote working, undermining retail and office REITs.

The listed property sector has been slammed as mall owners struggle to deal with the coronavirus crisis and they could face more pain in coming years, credit agency S&P has warned.

The agency said in a report on the Australian retail, office, and industrial sectors that the earnings and credit quality of Australian REITs will erode over the next year, with shopping centre landlords to be the hardest hit, followed by CBD office markets.

The entire sector is facing a deterioration in financing conditions that could hurt and limit its ability to expand, particularly as companies often tap equity markets to fund their growth.

But the REIT sector was in a much stronger liquidity position going into the outbreak than during the GFC and the more disciplined approach taken by property companies to liquidity means they have sufficient cash and undrawn bank lines to meet bank and bond debt maturing over the next 12 months.

The S&P warning comes after it took negative rating actions on a number of retail REITs on April 6, including mall owners Scentre, that owns the local Westfield empire, and Vicinity, as well as diversified group GPT and wholesale group QIC.

“Shopping centre landlords will be hit hardest among rated Australian and New Zealand REITs as retailers demand rent waivers, deferrals, or concessions to ride out a recession due to the COVID-19 pandemic,” S&P Global Ratings credit analyst Craig Parker said.

“For commercial landlords, the hit could extend beyond the lockdown period if the economic downturn exacerbates tenant distress and limits asset sales or other capital raisings,” he added.

About 27 per cent of Australian and New Zealand REITs have a negative outlook and he warned that further negative rating pressure could build up following the six-month moratorium on evictions for struggling tenants that can’t pay their contracted rents.

The pandemic may also hasten a structural shift toward e-commerce and remote working, undermining retail and office REITs with S&P citing cost cutting, staff reductions, and changing work patterns as the biggest risks to office landlords.

The shift would become more widespread with a prolonged disruption, cutting demand for office space and overall market occupancy over the medium to longer term.

By contrast, a boom in online orders would boost industrial landlords who own logistics space that provides the last mile of e-commerce delivery.

“Deteriorating financing conditions and reduced access to capital markets due to the COVID-19 outbreak will constrain real estate companies’ debt management. The real estate sector is highly capital intensive and relies heavily on debt capital markets,” Mr Parker said.

But he argued that ultimately Australian REITs had either strong or adequate liquidity to absorb the shock. “The REITs have sufficient cash and undrawn bank lines to meet bank and bond debt maturing over the next 12 months. We believe this reflects their more disciplined approach to liquidity management following the global financial crisis,” he said.