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More sellers than buyers for $11b shopping malls

The rush to offload retail assets, which most large landlords have historically sat on in a ‘buy and hold’ approach, is being driven by the progressively
weakening operating outlook, record low yields on retail assets, and falling
development returns, the report’s authors Adrian Dark, David Lloyd and Suraj Nebhani said.

“We believe the large increase in retail assets for sale over the last 12 months has
been accompanied by a further softening in appetite to buy,” they said. “We have flagged a thinning of the buyer pool for some time, and see evidence that this has worsened.”

The breadth of potential selling highlights a fundamental “broad-based” shift in the market.

Many landlords are selling for strategic or financial reasons, rather than because of the quality of their assets. “This suggests to us that many of the major
players are unlikely to bid on each other’s non-core assets – further narrowing the
potential buyer pool,” they said.

Vicinity chief executive Grant Kelley said since the group’s merger it had sold around 35 centres for about $2.7 billion. On average, they sold for about 0.5 per cent above their book value, he said.

“We probably have 10 to 12 assets which we would consider non-core strategically but they are only about 7 per cent of our balance sheet. They’re actually very good assets for the most part.”

Vicinity was “quite relaxed” about having to keep the centres on its  balance sheet until the market recovers, Mr Kelley said.

“We’ve done the heavy lifting. These assets if we had to retain them are good assets. If the commercial imperative is we can’t sell them today because there’s a glut of assets, obviously it’s not in shareholders interests to sell them so we will just keep them,” he said.

Data App director Rob Ellis said the flood of commercial retail assets listed for sale equalled around 1.3 million square metres of gross leasing area.

While the amount of unsold GLA was static in June, the volume of commercial retail space being listed for sale had slowed to a trickle, while transactions slumped.

The value of shopping centre transactions was at its lowest level since April 2017 and the volume of gross lettable area transacted during the month was the lowest since April 2012, more than seven years ago, he said.

“Whilst not quite a buyer’s strike, underlying trading conditions have clearly softened,” he said.

Citi’s analysts said they expected falling underlying values to weigh heavily on retail landlords’ share prices, as they had in overseas markets.

In the US and UK net asset value discounts of more than 20 per cent were common, despite values having already fallen significantly.

“We maintain our clear preference for non-retail exposure within the Australian REIT sector,” they said, reiterating sell ratings on Scentre Group, GPT Group, Charter Hall Retail, SCA Property and BWP Trust, whilst also downgrading Stockland to a ‘sell’ rating.

Mr Kelley said Vicnity’s share price was trading at a discount because of the online onslaught, stagnant wages growth, and slowing economic growth.

“It’s a sector discount. All the major retail names have had a pretty tough 12 months. We’re no exception but our competitors are the same,” he said.

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