‘Anemic’ Demand Forecast for Retail Assets

Online shopping is here to stay, which will put pressure on lesser quality retail assets into the future according to S&P Global.

S&P Global has revised the outlook for three retail Real Estate Investment Trusts (REITs) from negative to stable in a sign that the retail economy is weathering the Covid-19 storm but the forecast for the future remains ambiguous according to analyst Rhys Corry.

“Changing consumer behaviour toward retailing is yet to manifest into definitive trends,” Corry said.

“We expect the secular industry changes toward online retailing to persist, albeit at a gradual pace.

“Demand for retail space will therefore be anemic in the next few years … [particularly for] lesser-quality retail space that does not have a strong catchment area or solely fulfil an essential retailing requirement.”

Corry said retail centres in CBDs and near to public transport hubs would continue to suffer with the ongoing trend to working from home.

Corry said retail REITs had acted prudently to “provide a buffer for them to weather further disruptions”.

“We expect these REITs to continue to prioritise cash preservation and use available financial levers, such as expenditure curtailment, reduction in cash distributions, and other sources, to offset the impact of the pandemic,” Corry said.

GPT Wholesale Shopping Centre Fund was upgraded from BBB+/Negative to BBB+/Stable, while QIC Shopping Centre Fund and Scentre Group were upgraded from A/Negative to A/Stable.

“The outlook on Australian Prime Property Fund Retail remains negative given the uncertain outlook for the REIT from unit-holder redemption requests and recent asset sales,” Corry said.

“The stable outlooks on the other four REITs reflect their sizeable rating buffers to withstand volatile market conditions.”

S&P Global has forecast real GDP to grow 4.9 per cent in Australia, compared to -2.4 per cent last year.

REITs used financial levers, such as Scentre Group issuing a hybrid note, and Vicinity Centres raising equity, to build headroom.

“Our rated REITs have better asset quality and solid market positions relative to the wider market.

“Their shopping centres therefore benefitted from a faster recovery in tenancy cash collection and occupancy rates as Australia recovered from Covid-19.”

CBRE regional director Cameron Grier said industrial assets had been booming with the growth of online shopping.

“In 2020, e-commerce experienced five years of growth in just 12 months and now accounts for around 13 per cent of all retail sales in Australia,” Grier said.

“This, coupled with the fundamental rethink of how occupiers deal with inventory levels, has created considerable momentum in the industrial and logistics sector in 2021.”