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Fitch: REITS Battle Falling Discretionary Category Replacement Rentals
April 9, 2014 / 11:26 PM / 3 years ago

Fitch: REITS Battle Falling Discretionary Category Replacement Rentals

(The following statement was released by the rating agency) SYDNEY, April 09 (Fitch) Fitch Ratings says Retail REITS are facing falling replacement rents in core discretionary specialty store categories such as fashion and footwear. REITS with strong international brands such as Westfield Group (WDC, A-/Stable) are best positioned to mitigate these risks. Australian prime retail property owners and managers have enjoyed a steady rental growth over the past five years in an environment of subdued retail spending growth. The bifurcation between rental growth rates and merchant sales has translated into higher specialty occupancy costs (rental cost/turnover), and falling replacement rents (the ratio of rents paid by new tenants that replace vacating tenancies). Replacement rents are weakest in discretionary spending categories such as fashion, which respresents about a fifth of specialty rentals at typical super regional shopping centres, with new lease rentals declining by 3.5% to 4% over the 18 months to December 2013. A natural buffer to falling speciality rentals is the well-staggered specialty rental portfolios with 80% of maturing leases being renewed and linked to CPI, or a fixed growth rate. Retail spending forecasts over the next three years are mixed according to leading indicators such as consumer confidence and the strength of the residential housing market. Overall momentum in retail sales has been strong over the past six months to January 2014 due to the rise of residential property prices, but consumer confidence has suffered in light of rising unemployment rates and the heightened prospect of a near term rate rise. DRIVING RENTAL INCOME GROWTH Landlords are using a combination of strategies to offset the impacts of the weak retail environment including: shifting the specialty tenancy mix towards more defensive categories such as food and leisure; and diversifying their anchor tenant portfolios into international mini majors. WDC has adopted an international mini major strategy, attracting international and domestic mini-majors such as Zara, JB Hi-Fi and Rebel Sports, thanks to the advantage afforded by the prevalence of its brand in international retail centres such as London and New York, as well as its fully integrated business model. Mini-majors have proven to be more productive users of WDC's retail space. WDC is able to drive rental growth and occupancy by synchronising its leasing mix, marketing campaigns, and shopping centre environments to ensure a customer offering that provides a maximisation of new visits and spends per visit. WDC's fully integrated model allows them to launch a new concept store within 12 weeks which serves as a critical competitive advantage in servicing the very profitable specialty store segment. The complete integration of services including marketing, leasing, and fit-out allow WDC to be the ideal incubator for new brands, not just a venue that attracts high-street shoppers from regional and national catchments. Contacts: Johann Kenny, CFA Director +61 2 8256 0348 Fitch Australia Pty. Ltd., Level 15, 77 King Street, Sydney NSW 2000 Vicky Melbourne Senior Director +61 2 8256 0325 Media Relations: Iselle Gonzalez, Sydney, Tel: +61 2 8256 0326, Email: Additional information is available at ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S FREE WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Fitch Australia Pty Ltd holds an Australian financial services licence (AFS licence no. 337123) which authorises it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.

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