Retail landlords face battle over lease terms

Vicinity Centres, which part owns Chadstone Shopping Centre, will face a tough battle over the terms on which tenants anchor their centres. Picture: Tony Gough

The proposed national code is focused on smaller tenants that have been hit hardest by the coronavirus but large tenants are seeking to cut their rental payments during the crisis and dramatically cut back their store footprints once it is over.

Shopping centre owners rallied on Tuesday after they eked out concessions in the plan for dealing with troubled tenants that was unveiled by the Prime Minister.

The landlord’s shares had been slammed on Friday due to fears they would shoulder more of the pain their tenants are suffering, as many have shut shops due to strict limits on movement and a savage drop off in trade.

An initial rescue package was delayed on Friday and at that time Mr Morrison emphasised the importance of landlords sharing in tenant difficulties, prompting a sharp slide in retail property share prices.

But the package detailed on Tuesday, which focused on small to medium businesses turning over less than $50m, leaves larger national retail chains out in the cold, obliged to negotiate their own agreements with large landlords.

Scentre shares added 3.9 per cent on the news to close at $1.75 and Vicinity lifted 5.3 per cent to $1.185. Stockland rose 2.8 per cent to $2.56 and GPT edged up 2.4 per cent to $3.83.

Mr Morrison said the emphasis on smaller businesses was due to their greater vulnerability and added that they had less access to finance than larger companies.

The focus on the smaller end means a tough battle is to come between large landlords including local Westfield owner Scentre, Vicinity Centres, Stockland, GPT, Lendlease and Mirvac, as well as unlisted players AMP Capital and QIC, about the terms on which tenants anchor their centres.

Billionaire Solmon Lew has shut down the stores in his Premier Investments business and Myer has closed all 60 stores for four weeks, with South African-owned David Jones shutting some small format fashion stores, and Country Road also shut.

But the pandemic has put the shopping centre model under pressure, particularly as smaller tenants were already on the brink due to weak consumer spending.

LeaseWise managing director Ange Kondos identified concerns for small tenants as the code did not address costs relating to outgoings. He warned retailers risked being hamstrung by rental back payments when they were trying to get on their feet.

“I don’t think it goes deep enough,” he said. “The intentions are good but they should look at these numbers more closely.

“The pandemic is the great leveller for the industry. Shopping centres won’t have the ability to chase false high rents and underpin them with cash incentives; they will have to actually look after the long standing tenants or their model unravels.”

Peak lobby group the Property Council of Australia said there were “a number of questions unresolved” by the cabinet decision. PCA chief executive Ken Morrison said the code asked commercial property companies to shoul­der a lot of the financial burden.

The Prime Minister also called on banks to support commercial landlords as they dealt with debt covenants. Large property owners also had complex financial obligations, including to offshore lenders, “which must be given careful attention”, the PCA said.

Landlords also emphasised that leases could not be torn up by unhappy retailers. “We also are relieved that the risky idea of allowing tenants to terminate leases has been taken off the table. That would have been a dangerous precedent for our financial system,” the PCA’s Mr Morrison said.

He called for changes to the code to ensure small property companies were protected and The Australian was told many private landlords have taken a harsh line as they are under pressure from their own lenders.

“We must avoid a situation where too much of the burden of delivering relief for tenants is expected to be carried by commercial property owners,” the PCA chief said.