The ongoing residential downturn will hit retail sales growth, creating a “meaningful” downside risk for major mall landlords, including Scentre, Vicinity and GPT, according to Citi.
Housing downturns drive a slowdown in retail sales growth. The Citi team measured the extent of that impact after identifying 24 state-specific housing downturns since the 1980s.
Over the course of each downturn, retail sales growth halved, falling from 5.7 per cent on average before the housing slowdown to 2.9 per cent by the time dwelling prices had bottomed.
So far, Sydney house values have fallen 8.2 per cent from their peak in the middle of 2017, while Melbourne has experienced a 4.7 per cent fall in prices over the year.
With prices falling faster than expected HSBC this week revised its outlook with a fresh forecast that housing prices in Sydney and Melbourne could fall between 12 per cent and 16 per cent from peak to trough.
The immediate impact of slower retail sales growth on earnings growth for shopping centres owners is limited because lease deals are typically locked in over longer terms with fixed rent increases.
However, over the longer term, flagging sales will start to hurt the landlords.
“Sales trends are a powerful lead indicator for retail rents,” the analysts – Adrian Dark, David Lloyd and Suraj Nebhani – wrote in a piece of broader research tracing through the varied impacts of the housing downturn this week.
Slowdown to hurt share prices
As retail sales growth slows, so too does comparative store sales growth dwindle across mall portfolios.
“In this scenario, we expect that retailers will continue to push for rent reductions when their leases expire – ultimately reducing rent growth for shopping centre owners,” the Citi team wrote.
“This implies that a housing-led sales downturn will weigh on rent growth for groups like Scentre and Vicinity for years to come.”
There is worse news though for the major landlords because, according to Citi, slower sales growth is associated with a de-rating of a stock’s price-to-earnings (PE) multiple.
A 2 per cent deceleration in sales growth supports a de-rating of the PE multiple of around 1 times.
That is equivalent to a 6-7 per cent move in share prices, excluding any earnings-per-share change.
On this basis, a typical housing led-slowdown could lead to a de-rating of the PE multiple by 1.5 times, leading to a 10 per cent decline in share prices.
A 10 per cent fall in share price might seem large given the modest near-term earnings impact of a sales slowdown, according to Citi, but it is the market’s recognition of a change in the longer-term earnings outlook.
“Long-term leases provide a buffer for near-term earnings, but delay, rather than eliminate, the impact of weak retail conditions.”
In Citi’s view, Scentre and Vicinity are most exposed to the housing-led downturn as retail pure plays which are heavily weighted to large shopping centres and have the bulk of their portfolios in NSW and Victoria.