Mauling of values continues

The coronavirus pandemic is taking a heavy toll on shopping centre landlords as some of the world’s largest companies refuse to pay rent or demand cuts, forcing landlords to lower the value of their retail property holdings.

The Australian can reveal that companies including 7-Eleven and McDonald‘s have joined Hungry Jack’s in seeking changes to rent deals or in stopping payments as the crisis peaked.

Solomon Lew‘s listed Premier Investments and Sussan Group are also negotiating to not pay rent for periods when they were shut down and to pay rent as a proportion of sales turnover when they reopen.

The fraught negotiations over shopping centre leases have dragged in some of the country‘s largest landlords, with senior sources saying there was a stand-off between mall owners and key tenants.

The problems are hurting listed portfolios, with property investor Mirvac flagging a near $300m hit to the value of its retail portfolio, while both its office and logistics portfolio bumped up in value.

Rival company Dexus said its towers and parks had virtually held their values.

In a sign of the growing split between the real estate sectors, the office powerhouse also sold off a $530m tower in the heart of the Sydney CBD for more than it was valued at last year.

It sold the tower to Singaporean company Peakstone, via CBRE.

Its overall valuations showed a dip of about $200m, as prime office towers retain their value.

“Our high-quality property portfolios were in a strong position as we entered into a period of uncertainty driven by the onset of the COVID-19 pandemic, with their high occupancy levels, diversified tenant base, and limited new supply coming online in our key office markets,” Dexus chief executive Darren Steinberg said.

He said the valuations showed the resilience of high-quality portfolios in the uncertain environment. “The office portfolio experienced a circa 1.5 per cent decline on prior book values as a result of the softer assumptions relating to rental growth, downtime and incentives over the next 12 months,” Mr Steinberg said.

The sharpest rental disputes between landlord and tenants are emerging in the stressed retail sector.

In a letter to landlords as virus concerns peaked, 7-Eleven said that should the impact on its sales continue, it would have to “carefully consider” cost-control methods, and it cited temporary lease commitment relief as a measure to ensure the ongoing viability of each of its stores.

The chain, which has more than 700 stores, said that it intended to stay open unless directed to shut by government.

But it said that the unprecedented impact on consumer confidence had already been reflected in the sales performance at a number of stores in its network.

McDonald’s told landlords that restrictions on trade were having a significant and direct ­impact on its business and in particular, its local operators.

In March, as food courts were closing, it laid out its position to shopping centre landlords.

“Despite changes in operating hours or closure of stores our exposure at this time to occupancy costs is unsustainable and is an area of considerable concern.

“Due to this fundamental change in our ability to trade as intended, we seek the immediate cessation of financial obligations under the lease (to be reviewed on a monthly basis),” the letter said.

A McDonald’s spokesman said that since that time the company had provided significant support to its franchisees in freestanding stores around Australia and it was in talks with shopping centre landlords where it traded.

These were occurring on a store-by-store basis and reflected the conditions in which they were operating.

Rival chain Hungry Jack’s sought to push back rents until virus-related restrictions are lifted.

The fast food chain initially proposed to defer gross rental payments for three months, or until the restrictions are lifted and trading patterns show signs of returning to normal.

The Jack Cowin-owned chain later told landlords that rents would be deferred for three months.

In contrast, some local companies are sticking to their leases.

United Petroleum fully paid its rent for April and May. After first writing to landlords saying it did not know how it would be affected, United paid half of the first month‘s rent and then followed up with daily trading updates to landlords.

Even though profits were down, the company decided to fully pay rent rather than seeking relief under the Morrison government‘s leasing code.

One landlord told The Australian that the implementation of the code across different states had made it inconsistent and difficult to apply.

Mirvac on Wednesday revealed it would cut the value of its mall portfolio by 9.9 per cent and similar writedowns have been flagged by Vicinity Centres, co-owner of Melbourne icon Chadstone. Westfield owner Scentre is also likely to be hit.

“COVID-19 has transformed the world in the space of a few short months. No sector has been untouched by the health and economic crises that have developed. These are unprecedented times and Mirvac is taking necessary measures to address these challenges, including appropriate capital management,“ Mirvac chief executive Susan Lloyd-Hurwitz said.

Mirvac‘s sharp devaluations cut about $306m off its portfolio.

Dexus announced that 107 of its 118 assets, comprising 42 offices and 65 industrial complexes, had been externally valued, resulting in a total estimated decrease of about $195m, or 1.2 per cent on prior book values.