Slow retail growth and increased e-commerce penetration is exposing retail real estate investment trusts (REITs) to weaker rental growth, with Stockland and Vicinity Centres the most at risk, according to Moody’s.
Discretionary spending is expected to be weak over the next one to two years, putting downward pressure on retail rental growth said Moody’s analysts. This problem will be exacerbated as consumers turn to online shopping over brick and mortar sales, further hampering rental growth.
“Until recently, solid overall retail sales growth has partially insulated retail A-REITs from the challenges provided by online shopping,” said Moody’s senior credit officer Maurice O’Connell.
“However, lower retail sales growth is now exposing retail REITs’ vulnerability to increasing online penetration.”
Online sales penetration up
The broker said online sales penetration would rise to 13-14 per cent by 2020, from almost 10 per cent in 2018. This increased penetration would mean market share for bricks and mortar retailers would shrink.
At the same time, the year-on-year growth rate in retail sales has slowed since a peak in 2014. This is primarily driven by low discretionary spending growth that is expected to “be sub-par over the next two to three years due to sluggish wage growth, concerns around employment and overall cautious consumer sentiment in part due to declining house prices”.
Retail REIT portfolios that are overweight on “department stores, apparel, jewellery, personal care and electronics are most at risk, particularly Stockland Group and Vicinity Centres”, Moody’s analysts said in a note released this week.
“Portfolios that are anchored by largely non-discretionary supermarkets such as Mirvac Group, Charter Hall Retail REIT and Shopping Centres Australasia Property Group will be more resilient.”
The report comes in an environment where $16 billion has flooded into REITs over the last eight months, as investors search for yield in a low interest rate, low bond yield environment.
Increased exposure to e-commerce is not the only headwind facing retail REITs. Research released last week by Citi said an overhang of retail assets on the market would put downward pressure on prices.
“We estimate potential for disposals of circa $11 billion of Australian retail assets, or close to three years of typical transaction volume,” the broker said in a note on Friday.
As a result share price risk remained “skewed to the downside”.
Citi had sell ratings for Scentre Group, GPT Group, SCA Property Group, Charter Hall Retail REIT and BWP Trust.
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