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Values diverge for Australia’s property trusts

After a recent rally which followed shopping centre malls reopening and strong sales as shoppers flocked back, retail trusts have faded again on the ASX.

Preliminary valuations for one of the country’s largest retail landlords Vicinity Centres indicate a hit to book values of between 11 to 13 per cent, or $1.8 billion to $2.1 billion.

COVID-19 just accelerates the structural de-rating of malls and rents to more sustainable levels.

Jefferies head of real estate, Sholto Maconochie

Vicinity chief executive Grant Kelley reacted to the uncertainty earlier this month by taking “decisive action,” launching a $1.4 billion capital raising to preserve the group’s balance sheet.

By contrast Dexus’ concentration on office and industrial property has shielded it from the worst effects.

On Wednesday it reported an estimated fall of 1.2 per cent or $195 million in the book values of its 118 assets. In the six months to December last year, values in its portfolio rose $656 million.

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“Our high-quality property portfolios were in a strong position as we entered into a period of uncertainty driven by the onset of the COVID-19 pandemic,” chief executive Darren Steinberg said.

While the outlook remains uncertain, Mr Steinberg expects office and industrial values to “remain resilient with pricing supported by an attractive yield spread over bonds and [the] lower for longer interest rate environment, with some impact from a softer outlook for rental growth, downtime and incentives.”

While retail REITs face 18 months of weak demand from the disruption, property values would need to fall 34 per cent to breach the top end of rated REITs debt to asset ranges and fall a whopping 55 per cent to breach covenant thresholds, Moody’s Investors Service says.

“Without debt reduction, Scentre Group’s gearing will breach its rating tolerance levels if property values fall more than 27 per cent. But Scentre’s gearing will remain well within its covenant thresholds,” it said.

Moody’s expects office property values to decline only moderately over the next 18 months and does not see significant risks to their debt levels.

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Unlike retail and office, industrial asset values will be flat to up slightly over the same period as the pandemic accelerates e-commerce penetration and focuses the attention of businesses on their supply chains.

Goodman Group and Charter Hall are both benefiting from the shift.

“COVID-19 just accelerates the structural de-rating of malls and rents to more sustainable levels and we expect industrial to be a net beneficiary from increased online sales penetration,” Mr Maconochie said.

Prime office towers are also likely to prove more resilient with tenants staying put and new social distancing norms making firms more reluctant to give back space or put it on the sub-lease market, he said.

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