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According to JP Morgan, it was a messy REIT reporting season as COVID severely disrupted income, particularly for retail landlords.

Key takeaways in their report were as follows:

Retail Sector

  • The six months to Jun-20 was as rough a period for retail landlords as we can recall, with COVID having a material impact on income, sales and valuations.
  • Retail sales were severely disrupted by closures and lockdowns in March and April but have improved in May June and July.
  • Retail rental growth was estimated to be 42% lower on average for large malls, following $580m of rent waivers or rent provisions, equivalent to 37% of the prior rents. Assets were written down ~11% and they expect a further ~15-20% decline over the next 12 months for large malls.
  • Meanwhile, neighbourhood shopping centres and outlet centres were far less disrupted.

Office Sector

  • Office rental growth slowed to +2.4%, boosted by latent positive rental reversion.
  • Sub lease vacancy (June 2020) in Sydney was 1.14% up from 1.06% in March and in Melbourne was 1.4%, up from 0.70% in March. JP Morgan see the extent of the contraction in Sydney as worrisome as is the pace of the deterioration in Melbourne. They forecast a 10-20% reduction in net effective rents with the majority of this correction yet to be realized as vacancy increases to 10-12% in the next two years.
  • In terms of asset values, reporting season saw the average cap rate firmed only 10bps from 5.9% to 5.8%.

Industrial Sector

  • Industrial rental growth slowed to +1.4%, while asset values are still firming. Tenant demand has slowed, rent growth is effectively flat but rent growth prospects remain sound.
  • COVID had only a minor impact on Industrial performance. Rental growth ranged between +1.1% and +3.3%.
  • Occupancy was flat in the high 97% range. Asset values increased ~1.5% in the Jun-20 half as the cap rates firmed ~10bp to 5.7%. Investment demand remains extremely strong, with institutional capital continuing to try and lift its industrial exposure.
  • They argue fundamentals remain solid for Industrial, particularly given the disruption in retail and office JLL data shows Sydney Industrial capital values increased ~5% y/y and the asset delivered a 10% total return driven by ~20bp of cap rate compression to an average 5.0% cap rate and rent growth of 2.8%. Rent growth is in line with the ten year average at just under 3% pa. Incentives ticked up from 10% to 13%.

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