Australian shopping centre landlords don’t fall shortFebruary 28, 2019 / By
Investor sentiment towards listed retailers in Australia remains relatively weak – but not necessarily towards shopping centre owners. Major retail landlords such as Scentre Group and Vicinity Centres have less than 1% of their issued stock held in short positions.
While real estate companies are among the least shorted stocks on the Australian Securities Exchange (ASX),retailers are among the highest. Increasing e-commerce competition and cyclical economic drivers such as declining residential prices are anticipated to weigh on Australian retailer performance. This has led to equity investors pricing in the impact of increased competition and risk. For example, JB HiFi, a major electronics retailer, has over 15% of its issued stock held in short positions – largely due to the anticipated impact that major e-commerce players like Kogan will have on the electronics segment.
Although anticipated poor retailer performance is a threat to income growth and subsequent capital value, there continues to be a disconnect in the performance of retail companies and shopping centre landlords. This disconnect reflects the protective mechanisms in place which make owning shopping centres a defensive proposition in Australia. Such mechanisms include planning systems that can limit competing supply in primary catchment areas, long term leases which provide time to implement tenant remixing strategies, and fixed rental escalation (generally CPI) which provides in-built income growth.
Another key factor is that capital value risk may already be priced in, with the share prices of a number of listed landlords currently trading below their net tangible asset value. This means that the equity market has already factored in future lower real estate valuations despite generally robust valuations to date. Furthermore, considering the uncertain outlook for global financial markets in 2019, stable income equities like REITs may be favoured resulting in REIT share prices remaining steady.
Although a drastic underperformance of retail landlords is not anticipated in the near term, it’s no secret that demand for physical space is under pressure, meaning that proactive portfolio and asset management is required. Multiple landlords have already engaged in strategies such as portfolio restructuring and tenant remixing to incorporate better performing tenants such as food and service providers. Mixed-use value adding is also becoming prevalent with landlords incorporating residential, hotel or office development into retail assets which is supporting underlying land values. Additionally, landlords may look to extract ancillary income through sources such as managed parking, electricity income and advertising. In their recent 1H19 results, Vicinity Centres noted that ancillary income accounted for 12% of their net property income.
While the number of short positions isn’t always directly correlated to future market movements or actual financial performance, it reflects equity investors’ future expectations for share prices. There are mounting pressures on Australian retailers, but shopping centre landlords have managed risk to date, and have the opportunity to further transform and reposition their assets.
Figure 1: ASX 200 – % of industry group held in short position (February 2019)
Source: ASIC February 2019
 Retail includes the following GICS sectors: Retailing, Household & Personal Products and Food & Staples Retailing
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