Retailers face 'double whammy' of falling rents, values
Super fund-backed commercial property investor ISPT has warned retail property owners face a “double whammy” of falling rents and asset values that will not correct any time soon.
Speaking a day after ISPT’s retail fund reported a lacklustre 3.3 per cent annual return, chief executive Daryl Browning said retail landlords across the board faced the unhappy situation in which property values that fell faster than rents pushed their cap rates – or yield – higher.
“If you get the double whammy of your income falling and cap rates reversing, then that can be very painful and would drive returns down,” Mr Browning told The Australian Financial Review on Thursday.
“I think you’ll see a bit more of it because unless rents are growing, it’s hard for value to grow.”
The weakness of retail property was laid bare this week by ISPT’s annual report that showed the $1.7 billion, 38-asset ISPT Retail Australia Property Trust made an after-fee return of 3.3 per cent last year, 10 percentage points below its performance a year earlier and below its five-year average return of 11.2 per cent.
The report showed ISPT’s largest fund, the $15.2 billion ISPT Core Fund, was also hit by the softening retail sector. Its total returns fell to 7 per cent, down from 12.5 per cent a year earlier.
Mr Browning, speaking on the sidelines of the 50th birthday celebration of the Property Council of Australia’s Victorian chapter, said that all retail was under pressure and his fund had held up relative to others in the industry.
“For us, if it’s a fund that’s simply exposed to retail, the returns are lower, but relative to our benchmark, which is the peers, we’ve done okay,” he said.
“In the Core Fund, yes, because let’s say office has done well and industrial’s done well, then they’re insulated a bit from that lower performance of retail.”
Any corrections to the retail downturn was unlikely any time soon, he said.
“So that’s the unknown – will it correct? What it usually does is not do it very quickly.”
The downturn would likely discourage asset owners from revaluing their portfolios, he said. While ISPT revalued its portfolio quarterly – “we’re probably the extreme” – some owners only did it every second year, Mr Browning said.
Others do it sporadically and some, not at all.
“If you don’t value you’re not changing anything,” Mr Browning said. “Harvey Norman was the classic; which is a property portfolio. He [Gerry Harvey] said ???I’m just not going to value it’. ”
Retailer Harvey Norman, which owns its own stores, refused to revalue any of its properties over a six-month period – a devaluation could have cut the company’s profit – in the wake of the GFC that saw Australia’s listed real estate companies write down a collective $14 billion in values.
“I’m not going to revalue or devalue anything,” Harvey Norman executive chairman Gerry Harvey said in March 2009.
“I have taken the view that nobody knows what properties are worth at the moment.”
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