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Retail property investors are looking beyond the ‘trading valley’

Retail landlords have borne the brunt of lockdowns, but investor sentiment towards the sector is turning positive, say Pendal’s Pete Davidson and Julie Forrest

RETAIL landlords haven’t had a great time of late.

Covid-inspired lockdowns hit shopping mall owners harder than most. Unlike banks which froze — but did not cancel — loan repayments, unpaid rent money mostly won’t be recouped.

Yet investor sentiment for the sector is turning positive.

The malls are losing about a third of their income “but retail is getting better — it’s finding a bottom,” says Pendal’s head of listed property, Pete Davidson.

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The latest lockdowns in New South Wales, Victoria and the ACT came at a time when the retail real estate investment trust sector was looking much healthier than early last year.

Not only were people returning to malls, they were also spending more.

“People had plenty of money to spend and they weren’t holding back. Turnovers were improving quite nicely. Then Delta came along to ruin the party,” Davidson says.

Retailers are effectively being subsidised by landlords, explains Forrest. “During the lockdowns, landlords have to foot the bill.”

A rule of thumb is that about one-third of retail A-REIT (Australian Real Estate Investment Trust) income comes from the majors like Woolworths and K-Mart — and they’re still paying rent, says Davidson.

“Another third comes from the large-scale national speciality stores. They are across the country and still paying rent. Generally, those stores are looking beyond Covid and they’re operating in the States that haven’t closed down.

“It’s the mum-and-dads third that are doing it tough. They’ve been impacted and are finding it hard to pay the rent,” Davidson says.

Confidence is emerging

Notwithstanding the lockdowns, there’s confidence about the sector’s prospects.

“In the last lockdown, no-one knew what would happen and there was no vaccine or cure,” says Pendal portfolio manager Julia Forrest.

“This time around there is a vaccine, and people are prepared to look through the trading valley.”

There is less fear about the unknown, says Forrest.

“Investors have seen the other side of the valley. After the lockdowns last time around, there was all this pent-up demand which unleashed spending.

“There were superannuation drawdowns, fiscal stimulus in the form of JobSeeker supplements and people had a high propensity to spend.

“And people just didn’t take holidays. There was $40 billion in cash that wasn’t spent on holidays.”

The experience of last year has mitigated negative sentiment about the sector this year.

“Investors saw this massive reopening last time,” Forrest says. “They know there will be an end because there’s a vaccine this time around.

“They are prepared to look through the current lockdowns, as opposed to last time when no-one knew what was going to happen.”

About Pete Davidson, Julia Forrest and Pendal Property Securities Fund

Julia Forrest has managed Pendal’s property trust portfolios for more than a decade. She has 25 years of experience spanning equities research and advisory, initial public offerings and capital raisings.

Pete Davidson is Pendal’s Head of Listed Property. Over the past 34 years Pete has held financial markets roles spanning portfolio management, advisory and treasury markets. he specialises in the property, retail, insurance and infrastructure sectors.

Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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This article has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and the information contained within is current as at September 2, 2021. It is not to be published, or otherwise made available to any person other than the party to whom it is provided.
This article is for general information purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.

The information in this article may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information in this article is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

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