‘Quality’ shopping centres insulated against tenant woes: analysts
Analysts say shopping centre landlords such as Westfield, which have quality portfolios, are insulated against the current tough trading conditions anchor tenants such as David Jones are experiencing.
It follows David Jones, which has nine out of its 37 department stores in Westfield shopping centre, issuing a profit downgrade yesterday with total sales for the fourth quarter of the 2011 financial year expected to be about 11% lower than forecast.
Analysts claim landlords of marginal shopping centres are at a greater risk in the current retail environment.
News of the David Jones downgrade came as a third shopping centre in the Austexx group, the Spencer Street Fashion Station at Southern Cross Station in the Melbourne CBD, was placed in the hands of receivers following the collapse of Torquay Central, in regional Victoria, and the Flinders Plaza in Townsville in the last two months.
David Jones CEO Paul Zahra blamed the downgrade on an unprecedented rapid deterioration in trading conditions.
However, analysts say the link between the troubles facing David Jones and Westfield are “somewhat tenuous”, with John Kim from investment group CLSA telling the AFR that while anchor tenants lease 56% of space in Westfield stores, they generate just 17% of income.
Furthermore, Kim says rents paid by department stores are not tied to sales, with David Jones holding leases averaging 15.4 years and Myer leases of 11.1 years.
According to Kim, other anchor tenants including Myer, Woolworths, Coles, Target and Kmart are performing well.
As a result, brokers are recommending Westfield Retail Trust, the subsidiary which accounts for the group’s 54 shopping centres in Australia and New Zealand, as a buy and are expecting a Westfield earnings forecast upgrade in August.
Rental growth is expected to remain positive, but at a subdued level.
Westfield will also benefit from an increase in demand for retail space from international brands targeting Australia.
Apple is set to spend more than $10 million on its first retail site in Brisbane, British clothing operator Topshop is eyeing up vacated Borders stores for its expansion and European fashion giant Zara is also set to open a flagship store in Brisbane.
The David Jones downgrade comes six months after the Productivity Commission launched its inquiry into the state of the Australian retail sector.
Retailers such as Coles and Myer and the collapsed REDGroup – all anchor tenants in many Westfield shopping centres – have complained of retail rents and occupancy costs being among the highest in the world.
In its submission to the commission, Westfield defended the rents it charges, arguing they are determined by market forces and fair given the foot-traffic generated through their shopping centres.
David Jones is yet to make a submission to the Productivity Commission.