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Will Vicinity And Scentre Sell Off Property Assets?

Citi has stated that two of Australia’s largest mall owners – Scentre Group and Vicinity Centres – could sell off some $4 billion of property assets in order to survive the COVID-19 crisis. “Citi warned longer-term shifts towards lower sales, driven by reduced incomes and more cautious consumers, much higher take up of online shopping, and retailers shutting down loss-making or marginal outlets were the catalyst for a major reset,” The Australian reported.

Indeed, the federal government’s ‘Mandatory Code of Conduct on SME Commercial Leasing Principles During COVID-19’ stated that landlords should reduce rents in a “proportionate manner” with loss of income for tenants. If implemented, this would significantly impact the income of property owners, given that many retailers have been shut since the start of the COVID-19 pandemic.

“Rent collection is the top challenge for retail landlords today and is expected to suffer the worst levels of non-payment of any property sector,” global property securities investment house Resolution Capital told the Australian.

Ratings agency S&P has placed about 27% of Australia and New Zealand’s REITs on negative outlooks, and said there may be further negative ratings following the six-month moratorium on evictions for struggling tenants. In early April S&P revised the outlooks for four Australian retail REITs to negative.

“Shopping centre landlords will be hit hardest among rated Australian and New Zealand REITs as retailers demand rent waivers, deferrals, or concessions to ride out a recession due to the COVID-19 pandemic,” said Craig Parker, Credit Analyst at S&P Global Ratings.

“For commercial landlords, the hit could extend beyond the lockdown period if the economic downturn exacerbates tenant distress and limits asset sales or other capital raisings,” Parker said.

Conversely to the Citi analysis, S&P believes that Australia’s REITs have strong or adequate liquidity to absorb the shock of the next 12 months, due to their more disciplined liquidity management following the global financial crisis of 2008.

While mall owners will not benefit from the boom in e-commerce, industrial landlords that own logistics space may be bolstered by this trend.

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