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Watch out below! Fallout from Woolworths Limited to impact on property stocks

The fallout from Woolworths Limited’s (ASX: WOW) profit downgrade and departure of its chief executive will be felt beyond the retail sector with a number of property stocks likely to feel the impact from the headwinds buffeting the supermarket industry.

Rising competitive pressure appears to have caught Woolworths off guard and it isn’t the only one feeling the pain with Metcash Limited (ASX: MTS) also trying desperately to turnaround its fortunes.

The reality is that it will likely take years before Woolworths or Metcash can definitively prove they have turned a corner and that’s going to weigh on earnings of landlords like Charter Hall Retail REIT (ASX: CQR) and Shopping Centres Australasia Property Group Re Limited (ASX: SCP).

Charter Hall’s largest tenant is Woolworths as it generates 26.4% of total base rent and because rent increases are tied to turnover, Macquarie warns that the shakeup in the supermarket sector will drag on earnings growth for Charter Hall.

SCP Property Group will also be heavily impacted as Woolworths and Coles supermarket owner Wesfarmers Ltd (ASX: WES) account for 61% of gross rent.

Other property companies that have a significant exposure to the supermarket sector include Stockland Corporation Ltd (ASX: SGP) and Mirvac Group (ASX: MGR) through their neighbourhood shopping centres.

PropertyStocks

However, it is SCP Property Group that investors have more to worry about as the stock is trading at a premium to the market after its 23.5% rally over the past year compared with the 15.5% increase in the S&P/ASX 200 Australian Real Estate Investment Trust Index (Index: ^AXPJ) (ASX: XPJ).

SCP Property Group is trading on a 2015-16 consensus price-earnings (P/E) multiple of 16x, which is around 15% above the sector. Clearly investors have yet to price in the risk posed by its supermarket tenants.

I am not saying retail property trusts are going to come into strife because of the supermarket war, but I think the outperformance of the sector, as reflected in the chart above, is under increasing threat and you can find better value stocks to buy.

Value in this sector is hard to find in the current environment.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. Follow me on Twitter - https://twitter.com/brenlau

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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