Slide in retail values will get faster and sharper, warns Fidelity

Exactly one year on from Fidelity’s initial research paper, Retail’s fall from grace, its investment director for real estate, Adrian Benedict, has doubled down on the forecast, warning that values have further to fall yet, noting the sale of a half stake in Adelaide’s Westfield Marion last month at a 9 per cent discount to its book value.

“I think we’re closer to the trough, but not that close,” Mr Benedict said.

“The slide is going to get faster and sharper. This is simply the start of that process of unwinding valuations.

“It will be interesting how valuers now respond to market evidence of the Marion centre and see where the December valuations are for the big funds and how it might wash out for through the system.

“What everyone does appreciate is that values today are not necessarily a true reflection of all the risks.

“The valuers are in a difficult position. They have to look for evidence before they can adjust the valuations. You’re in a bit of a phoney war in the absence of that. It could take a year; it could take three years,” Mr Benedict said.

Weak consumer spending
The impact on UK retail real estate already has been stark, while the US market has undergone its correction. In the Fidelity view, a similarly sharp de-rating is likely for other Western markets, notably France and Australia, where there is a high level of retail space per capita and weakening consumer spending growth.

The level of rents and amount of floor space are becoming uneconomic for many bricks-and-mortar retailers, under pressure from declining revenue and increased competition, according to the Fidelity analysis.

Retail property values face a double whammy: rents will be forced downwards to become sustainable for tenants, accompanied by a further derating by the market to reflect the increased risk that retail tenants, and their cashflows, now represent.

As Mr Benedict explains, a broader historical narrative is playing out. For 30 to 40 years preceding the global financial crisis, retail was the darling of the property sector, courtesy of a consumer boom driven by retail spending growth and rising wages.

“Today we are in a very different environment,” he said.

“All those factors which led to this consumption boom are ebbing away. We are not seeing wage inflation, we are not seeing productivity growth, we are not seeing improvement in standard of living.”

The contribution of consumption to GDP growth has fallen sharply compared with a decade or more earlier in markets such as the UK, the US, Europe and Australia.

That’s why for Mr Benedict the impact of online retailing can be overstated. It is just one factor in a much broader picture of weakening consumption in Western democracies.

“People spend if they have the money to spend or are confident that they have the money to spend,” he said.

“In spite of the cash rate having fallen quite substantially here in Australia or in the UK or other major economies, the willingness of people to spend in the way they once did is no longer.