S&P Global Ratings says owners of retail and office premises are likely to be hardest hit by COVID-19 fallout but there could be a bright spot for owners of warehouse space

S&P Global Ratings says owners of retail and office premises are likely to be hardest hit by COVID-19 fallout but there could be a bright spot for owners of warehouse space

The problems faced by commercial property landlords will probably get worse and last for much longer than the current lockdown, according to credit ratings agency S&P Global Ratings.

In a report on REITs (Real Estate Investment Trusts) in New Zealand and Australia, S&P said the fallout from COVID-19 "could last longer and deeper" than the current lockdown period.

"Shopping centre landlords will be hardest hit," the report said, as retailers demand rent waivers, deferrals, or concessions to ride out a recession due to the pandemic.

"For commercial landlords, the hit could extend beyond the lockdown period if the economic downturn exacerbates tenant distress and limits asset sales or other capital raisings," the report said.

"Furthermore, the pandemic may hasten a structural shift towards e-commerce and remote working, undermining retail and office REITs.

"Cost cutting, staff reductions and changing work patterns are the biggest risk to office landlords.

"This shift will become more widespread with a prolonged disruption, cutting demand for office space and overall market occupancy over the medium to longer term."

However there was also a bright spot in the report, which said a boost in online orders could prove to be a boon for landlords with premises such as warehouses used by logistics companies, because of the increased volumes they were likely to be handling.

The report also warned that commercial landlords could have difficulties obtaining finance.

"Deteriorating financing conditions and reduced access to capital markets due to the COVID-19 outbreak will constrain real estate companies' debt management," the report said.

"The real estate sector is highly capital intensive and relies heavily on debt capital markets.

"Nevertheless, we believe Australian and New Zealand REITs have either strong or adequate liquidity to absorb the shock.

"We believe this reflects their more disciplined approach to liquidity management following the Global Financial Crisis."

S&P said just over a quarter of the REIT's that it rated in Australia and New Zealand had negative credit outlooks.

"Further negative rating pressure could build up," the agency said.

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7 Comments

"Cost cutting, staff reductions and changing work patterns are the biggest risk to office landlords." If it's going to be bad for Commercial Landlords, it's also going to be bad for Residential Landlords too in the long term.

Falling wages coupled with a big shift to the 'gig economy' with more people working from home, will take the pressure of the rental market with less need to work in large cities or even in a central area. So not good news for Residential Landlords. On the plus side much better for the environment and air quality. :)

Industrial property will be the least affected, as compared to retail and office.
No matter what new inventions or ways to do things come to pass, all three dimensional objects have to be stored, repaired, transported, packed or looked after.
Not until we can transport solid objects through the internet, where you can order a fridge and it turns up in your kitchen plugged in ready to go, will the industrial sector feel the pain. Hardly likely.
In the portfolio I look after, all industrial, has all the tenants in place, and 85% of the rent continues as before with the remainder on short deferments for one month only. It will be 100% within 2 months.

Correct, BD.
We have a large warehouse with offices, and our tenant is a manufacturer of a food product that is produced next door and exported.
Our tenant hasn’t missed a single day of production and have said that they have never ever been busier.

Both commercial & private landlords soon lodge an appeal to govt. to have tax payers subsidy always like that in Property centrist economy - The losses counts from the Covid19 to be look at, but please.. never dig the past 10 years of gain, all assets class tend to deflate at some point of correction, but this particular RE activities has been designed as a masses scheme, too big to fail, all on board. Any future potential loss? is to be socialised.

One of the bright spots will be fully automated logistics. I saw just this at a German textile company almost 20 years ago: tight spaced racking, random stacking and picking via robot. No humans required.

Take the current Grocery chain:

  1. Imports plus devanning to central warehouses
  2. Outers unpacked to inners and shelved
  3. thence picked and shipped to supermarkets (which do have some direct local purchases)
  4. store minions unpack inners and shelf-stack to conventional aisles.
  5. Customer wants click/collect, so store manually picks from local supermarket aisles.
  6. Customer picks up from store

Steps 2 to 6 could be replaced by:

  1. Robotised outer-to-inner strip
  2. Robot random stack to storage
  3. Robot:
    1. pick from storage
    2. strip inners to boxes
    3. assemble for shipping direct to customer based on confirmed and paid-for order
  4. Customer receives direct shipment at gate

Now this doesn't get everything to the customer. But it will be an 80/20 (Pareto) thang: it could easily replace a lot of tripping around. Core requirement: widespan warehouse and a good power supply....

And some robotic invention for the unpacking stuff......

I put my below post up as the 104th of an earlier commercial property thread that no one saw so will post again here. I agree with above comments on industrial; if anything as with KP & Argosy in low interest environment valuations will increase. But I don't wholly go with paradigm change for office and retail either.

I disagree with the paradigm change pieces that are being written ad nauseum now.

1. Factories have to factory, you can't move production to your staff home offices, that's why both Argosy and Kiwi Property are still revaluing industrial properties up, given the lower interest rate environment incorporated in capital valuation model (and let’s face it, while RBNZ remains in control, we have a low interest rate environment for years, if not decades).

2. Both Argosy and Kiwi devalued their retail portfolio: I guess that's easy to see why, but there will always be a place, as you say Davo36 for quality retail and high traffic malls ... and that's for retail and hospo ... my wife and I live in a remote place but we've always eaten out once every 10 days at least in the wineries around Marlborough: we really miss it and will be doing a splurge of eating out with friends as soon as establishments can open again: eating a fine meal together, or with friends will always be one of life's necessities for us. We're not alone. And people will always want to shop. Even me, yes, I can look at all the new model panel TVs on line and order one: but I'm not going to - you need to see those screens operating in a shop. Same: I'm never going to buy shoes online, etc etc.

3. Office space is the one where I most disagree with the paradigm change to workers staying at home thesis. Noting again both Argosy and Kiwi revalued office space up, government department tenants will always need office space, as will private sector service (lawyers, accountants, etc). And I say that with my wife and I running our own professional practice from a home office for 30 years: we could do that because we've deliberately kept our client base smaller so we can have a lifestyle, thus there's not a lot of client travel to our office (otherwise we couldn't work from home as we couldn't pass council parking space regs). Also we don't have children. Twitter is full right now with newly ensconced office workers in their home offices proclaiming how they never want to go back to an office: however, their bosses will be getting them back as soon as they can, as productivity will be plummeting: looking at the pictures going up, the home offices are cramped and pretty hopeless, most of them contain dogs and children, and parents tapping away on a tablet trying to talk to their kid ... that's hopeless. The only business type it can work for is where you are using contractors paid on output: if you're paying by the hour, employees have to be where the bosses are if you want to keep or improve productivity; the alternative story is a fanciful dream, and management knows that. A Zoom meeting with kids yelling in the background and all the preoccupations of home is nothing like a physical round table for getting collaborative work done. And I can prove that: I lived in Chch through the EQCs and have more than my share of government workers in my family: yes they were working from home for a while, but for all the reasons I've listed, it didn't work, and management soon sourced new buildings to get them back into the same working space. IRD in Chch went through a range of buildings as the earthquakes kept taking out new buildings, but they figured out pretty quick they needed to have office space. Finally, the one advantage of home office workers is they save the commute: fine, but how much of that time have they just sat in bed with a cup of tea over the last month :)

This is not to say some landlords will lose out badly: it's a building by building scenario also, and high leverage right now is 'difficult'.
Disclaimer: We own units in Oyster Direct Property Fund (we deliberately went unlisted so as not to cop the NZX REIT's stimulunacy premium). We expect to take a capital knock over next two years, and that's obviously annoying, but we're only in for yield and went in with just a portion of our term deposits when bank rates went sub 3%. I think over next decade with their good quality portfolio (44% industrial, 30% office) we'll still do better yield than term deposits. If not, diversification and all that, it's not the end of the world.