Nikko Asset Management is retaining an overweight position on retail real estate investment trusts despite underperformance, believing the market has incorrectly priced the assets.
The sector had been ‘battered’ by the COVID-19 pandemic as stores and shopping centres were forced to close due to social distancing restrictions.
This led to more online shopping and reduced footfall in bricks and mortar stores with spending on online goods rising 95% year-on-year in April 2020.
This, in turn, led to tenants pushing their landlords for lower rents and deferring making new decisions on long-term leases.
While this led to underperformance in the sector, Nikko believed there was still an upside for the sector. They also highlighted the value of the land owned by retail properties which could be repurposed as residential or offices if rents fell far enough.
Brad Potter, head of Australian equities, said: “Our view remains sanguine as even after we have rebased our rental assumptions materially downward, and slashed asset values, the retail names still look cheap. There is no doubt the long period of underperformance has coloured the market’s view on retail real estate, in our view this has led to a ‘shoot first’ mentality when it comes to this sector.
“For the retail names, the market has priced in a very fearful scenario and that’s why we have maintained our overweight position in this sector. We are retaining an overweight position on retail real estate investment trusts despite underperformance, believing the market has incorrectly priced the assets.”
Growth in online shopping in China rose strongly after the SARS pandemic and the firm said there was a possibility this could be the case in Australia.
“If this experience translates to Australia in a similar fashion, then we could expect an accelerated and maintained erosion of bricks and mortar sales and, in turn, the rents’ tenants will pay.”
