A sharp $694 million fall the value of landlord GPT’s wholesale funds suggests real estate’s traditional status as a safe haven for investors is being undermined by the unfolding coronavirus pandemic.
Property managers and landlords regularly review the worth of their bricks and mortar holdings using independent quarterly valuations.
GPT’s latest revaluation for March may be a “canary in the coalmine” for the sector. It shows a steep fall in the worth of its retail and office properties.
In a market update on Tuesday, GPT said asset values in its wholesale shopping centre fund were down 11 per cent, losing $511 million. GPT is the fund’s manager, but also owns a direct 28.5 per cent stake.
The steep fall was attributed to the pandemic’s impact on rental growth, restricted trading conditions and vacancy downtime, GPT said.
The fund manager’s wholesale office fund was also not immune. It dropped in value by 2 per cent or $183 million. GPT directly owns a 22.9 per cent share.
Chief executive Bob Johnston said the revaluations also reflected the impact federal and state government lockdowns were having on economic activity.
The steep repricing of shopping centre and office values follows a sharp 35 per cent plunge in the ASX200 REIT index over the past month.
REITs are traditionally seen as a safe port in a crisis because of their recurring rental income stream. That is now being challenged by Prime Minister Scott Morrison’s announcement of mandatory rent waivers and reductions of up to 50 per cent for businesses negatively affected by the pandemic.
In March, the ASX200 REITs dropped 35.1 per cent in value as coronavirus-linked fears sent equity markets into freefall.
JP Morgan’s Richard Jones said it was the worst monthly performance for REITs since the inception of the index.
“REITs underperformed the broader market by 14.5 percentage points. On a relative basis, REITs with defensive cash flows fared better, whilst retail landlords Centre Group and Vicinity Centres were down more than 50 per cent,” Mr Jones said.
S&P Global Ratings has revised its outlook on four Australian retail REITs to negative from stable, saying some have limited buffer to absorb a likely economic recession and depressed retail environment.
“Government measures to contain COVID-19 are particularly hurting industries that rely on discretionary consumer spending,” the agency analysts said.
“These include domestic and tourist spending on leisure, high-end, and “experience-based” retail. The large flagship assets that house these retail businesses are predominantly-owned by rated retail REITs.”
The rental income in these centres rely on high customer visitation to support their experience-based offerings.
The office sector is also likely to see rents hit with signs emerging of a slowdown in leasing activity.
Agency JLL’s first quarter 2020 March data for national office markets shows negative net absorption (businesses giving up office space) of 51,800 square metres.
It records the national CBD office market vacancy rate increasing by 0.1 per cent, from 8.3 per cent to 8.4 per cent.
JLL’s head of research Andrew Ballantyne said companies are moving quickly to change working practices. “While leasing inspections are still occurring, most organisations are delaying the decision-making process,” he said.
Tim O’Connor, JLL’s head of leasing, said the next six months will need a period of co-operation between landlords and tenants.
“Some organisations will require short-term assistance and landlords will assess this on a case-by-case basis,” Mr O’Connor said.
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