Tenant code brings relief for shopping mall owners

Retail landlords have surged on the back of a new code for small tenants even as they ready to slash the value of deserted malls.

An all but deserted Chadstone Shopping Centre in Melbourne Picture: Tony Gough

Retail landlords have surged on the back of the unveiling of a new code for dealing with small tenants even as they ready to slash the value of the deserted malls that they are trying to nurse through the coronavirus crisis.

The sector was relieved by the federal cabinet’s release of a mandatory code of conduct for commercial leasing, which was less draconian than initially feared in forcing landlords to take on the pain of shops closing.

Mall owner Vicinity Centres added 10.5 per cent on Wednesday and Westfield owner Scentre was up 7.4 per cent at $1.88. Stockland lifted 7.8 per cent and GPT rose 2.9 per cent.

The code applies to businesses with turnover of less than $50m and where they are eligible for JobKeeper as revenue has fallen by more than 30 per cent.

Landlords must offer “proportionate” reductions in rent in the form of waivers and deferrals based on falls in tenants’ trade during the COVID-19 pandemic period and in a recovery.

Vicinity chief executive Grant Kelley commended the federal government on the good faith principles proposed for the code that landlords and small retailers would share, in a measured manner, the financial risk and cashflow impact of COVID-19.

“We anticipate that the code will provide our industry with consistent guidelines to ensure we manage the business impacts of the COVID-19 crisis together with our SME retailers, through to recovery,” he said.

GPT chief executive Bob Johnston said it was a challenging time for many businesses as they dealt with the significant effects of the pandemic, and the code provided an important framework for small tenants and landlords.

Stockland managing director Mark Steinert said the company would engage proactively with its small tenants to determine eligibility and suitable solutions for their businesses. “As the impacts of this process will remain very uncertain until those discussions are complete, it will be some time before we know the full impact on Stockland,” Mr Steinert said.

Macquarie Equities said after the code was announced they estimated there would be a 13 per cent impact to a shopping centre landlord with a normal mix on a three-year view.

Much depends on the ability of landlords to capture deferred rent and there is a risk they will need to waive more rent. “We continue to focus on tenant performance which should underpin leasing discussions,” Macquarie said.

Property lawyer Matthew Bransgrove, who is advising tenants, is putting little stock in the code. He called it a “very poorly” drafted document that did not have the force of law but rather was a blueprint for state level retrospective laws to be passed.

It provided commercial and retail tenants with only a mechanism for minimum indulgences they could extract in talks with landlords, and he is urging tenants to take more drastic action.

“We are advising clients to seek a 100 per cent rent waiver for the duration, not to give further security, not to inject additional resources into the entities that hold the lease,” he said. “If the landlord is unwilling to agree then they should consider terminating the lease and commencing trade from home in another entity and liquidating the tenant entity.”

The harsh line being adopted by small tenants comes as more property funds are writing down the value of their malls. The $545m AMP Capital Core Property Fund, which invests in the manager’s wholesale shopping centre fund, has told investors it will cut the value of this interest.

AMP Capital said that as the ­effects of COVID-19 grew and the containment measures became more restrictive, it was seeing an immediate impact on the real ­estate market.

“We believe it is prudent to make an adjustment to the value of the AMP Capital Shopping Centre Fund units that the fund holds to reflect fair market value for this portion of the fund’s holdings, until the next monthly market valuations for properties are booked in the ASCF unit price,” AMP Capital told investors.

“We have made an adjustment to reflect a 5 per cent discount to the net asset value price of ASCF units, which was effective in the fund’s unit price.”

GPT this week announced that after taking into account the impacts of COVID-19, its unlisted office book value had declined 2 per cent and its retail fund’s book value declined 11 per cent.

The largest centres in Australia have been slammed by the fallout from the virus with many retailers in them closing down.

While valuation evidence is hard to come by as the market for major malls has effectively ground to a halt, the problems mean they are likely to fall heavily in value as income dries up and their long-term prospects fade.