The fallout from COVID-19 will linger beyond lockdowns for rated retail real estate investment trusts, according to new research.
COVID-19 containment measures have eroded the earnings of Australian and New Zealand retail REITs, hitting their credit quality amid unprecedented structural disruption, according to a new report by S&P Global Ratings.
“The fallout from COVID-19 will linger beyond lockdowns for rated retail REITs around the world,” Rhys Corry, a credit analyst at S&P Global Ratings, said.
“For Australian and New Zealand retail landlords, revenues plunged over the past few months as stores were shuttered and tenants were unwilling or unable to pay their scheduled rents.”
According to S&P research, while landlords used various strategies to protect their credit quality, including equity raising, dividend cuts and reduced capital expenditure, the pandemic fallout is expected to extend well beyond lower rental collections over the next few months.
The structural pain is also expected to prolong as faster adoption of e-commerce and changing consumption patterns continue to buffet the sector.
While online shopping has been a structural threat facing Australian retail landlords for some time, it has been a slow burn, S&P judged.
The agency noted, however, that while the level of e-commerce sales as a proportion of in-store retail sales remains well below markets such as China, the UK and the US, the COVID-19 pandemic has fast-tracked growth in online sales, intensifying pressure on retail landlords.
Australia Post revealed last year that 200,000 shoppers shopped online for the first time in April 2020, following the instatement of the first lockdown country-wide, with over a third of new shoppers opting for multiple purchases.
Late last year, Moody’s Investors Service predicted that the aggregate net operating income of Australian REITs would grow in the next 12-18 months, despite long-term structural challenges.
“A renewed focus on supply chains because of coronavirus disruptions and limited space availability will support demand for industrial assets, benefiting A-REITs active in this space,” Matthew Moore, Moody’s vice president and senior credit officer, said at the time.
Overall, Moody’s said it expects the rated REITs’ aggregate net operating income will grow around 2 to 3 per cent over the same period.