Stockland's retail portfolio most exposed as Australian retail landscape changes: Moody's

Several factors are changing the Australian retail landscape and increasing the importance of shopping mall location and quality for mall owners, according to Moody's.

These factors are changes in consumers' shopping habits, including the growing popularity of online shopping, sluggish consumer spending growth, and increasing urbanization that is widening the wealth gap between metro areas and the rest of the country suggests that latest report from Australian real estate trusts (A-REITs).

"These factors will have varying effects on the five single-A-rated (A-REITs) with retail exposure over the next three to five years," the Moody's report said.

"Scentre Group, GPT Group and Mirvac Group are better equipped to face these challenges and will maintain their portfolio quality because of their malls' favorable tenant mixes and locations in wealthy and densely populated catchment areas."

The report notes that it "expects year-on-year retail comparable net operating income (NOI) growth to be 3.0%-3.5% for Mirvac during the coming 12-18 months, and 2.5%-3.0% for GPT and Scentre."

Without recycling initiatives, portfolio quality will weaken for Vicinity Centres (A2 stable) and Stockland Group (A3 stable), whichhave higher exposure to underperforming, midsize shopping malls.

It is expected their retail comparable NOI growth will remain below the others in the peer group, with Stockland at 2.2%-2.4% and Vicinity at 1.4%-1.6% during the coming 12-18 months.

The three A-REITs' exposure to the retail sector varies, it is around 20% of group EBIT for Mirvac, 30%-35% for Stockland, and 40%-50% for GPT according to the report.

Of the three, Moody's suggests Stockland's portfolio is the most exposed to the changes in the retail sector because of its lower asset quality and higher exposure to midsize assets located in areas with weaker economic fundamentals.

"Vicinity and Stockland are working to improve asset quality, their plan's are to sell weaker performing assets and to develop residential, hotel and office space at existing malls are likely to improve their portfolio quality. However, we believe that they are unlikely to make step changes in their portfolio quality as it will take time to market assets and find appropriate buyers at this point in the property cycle," noted the investment analysers.

The retail environment is challenging and shopping mall owners have been facing slowing retail sales growth in Australia for the past four years, driven by low wage growth, rising household costs and, more recently, moderating house price growth, especially in Sydney and Melbourne.

These factors will continue to challenge retail A-REITs and their tenants, because they will constrain consumer spending and retail sales over the next 12-18 months.

Additionally, the increasing popularity of online shopping will slow sales for traditional brick-and-mortar retailers and increase competition among shopping malls.

Despite what was only a soft launch of Amazon.com, in 2017, the percentage of retail sales made online in Australia (by dollar value) was 7.5%, the report noted.

With online sales in more established markets like the US and the UK at 12.5% and 15.5%, respectively, the Australian online market has room to grow over the next several years.

In move to capture a greater share of this growth, Amazon launched its subscription-based free delivery service, Amazon Prime, on 19 June at half the price of membership in the US.

Shopping mall owners are adapting to the increasing popularity of online shopping by expanding digital, social media, and mobile retail offerings as well as increasing their weighting to service-based tenants.

The report expects, "A-REITs to maintain this focus as they look to maintain their relevance in the face of changing consumer habits".

"As sales growth slows, expect retailers to focus more on store productivity across their existing networks."

The recent acceleration of store closures, particularly from large department stores such as Myer, Target and Big W that are actively looking to scale back their sizable footprints, will alter shopping malls’ tenant mixes and weaken their ability to re-lease space now occupied by specialty stores at values above previous leasing arrangements.

The report forecasts that, struggling retailers will continue reducing floor space and closing stores but that despite these challenges, solid economic conditions are expected, which combined with stringent planning and zoning restrictions that limit new shopping mall development, will continue to support A-REITs' shopping mall portfolios and credit quality.