Retail CRE valuation to fall to up to 30%
Investors should be ready to factor in significant falls in valuation, in particular across discretionary retail of commercial real estate (CRE), with 20-30% and 5-10% drops, respectively, for regional shopping malls and convenience centres.
Pengana’s portfolio manager, Amy Pham, said that even though the penetration rate of online retailing in Australia was traditionally slow (11%) and was expected to grow to only 19% over the next two years, it would be enough to shift the power from landlords towards tenants.
“With this, we expect that there will be a rebasing of rents and shorter lease terms going forward,” Pham said.
“As a result, we're factoring in a 20-30% fall in valuation for regional malls and 5-10% for convenience centres as they're more defensive and exposed to supermarkets, and essential services.”
The estimates for the valuation for the pockets of office markets would subsequently see a 25% drop for central business district (CBD) offices and a 15% decline in case of metro offices as a result of a combination of growing unemployment rates and increased vacancies due to the successful adoption of technology enabling working from home.
The long-term headwinds, including a substantially growing unemployment and lower gross domestic product (GDP) growth, would not spare even a relatively well positioned sector such as logistics which was expected to benefit the most from the “new normal”, according to Pham.
“Logistic assets which form part of the supply chain for food and delivery of parcels have shown to be quite resilient. In actual fact, there's been an increase in demand from online retailing which has benefitted that subsector.
“We’ve factored in a 5% fall in valuations mainly towards the smaller logistic centres which are more exposed to the SMEs [small and medium enterprises]”
Pham, who manages the Pengana High Conviction Property Securities Fund which aims to be only Australia’s high conviction real estate investment trust (AREIT) with an environmental, social, governance (ESG) focus, believed that in the post-pandemic world investors should focus on the industrial sector which would offer more stability.
“I think the greatest opportunities will exist around the industrial sector, especially the ones that form a supply chain for ecommerce. Over the next couple of years this will be the only sector whereby we have cap rate compression instead of expansion, which is what we would have expected from the retail and office space,” she said.
As far as rent collections was concerned, based on the REITs quarterly updates, April looked as follows:
- Retail landlords were able to collect only 30 to 40% of last year's rent;
- For offices, they’re collecting about 70 to 80%; and
- For industrial, about 90 to 95%
According to FE Analytics, the S&P/ASX 200 A-REIT index returned -24.93% for the period of four months from the end of January to 31 May, 2020.
S&P/ASX 200 A-REIT index from 31 January 2020 to 31 May 2020
Source: FE Analytics
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