The shopping centre real estate investment trusts (REITs) had generated strong returns for shareholders up until around mid 2016. However, they have all fallen significantly since then.
Since July 2016 Vicinity Centres Re Ltd (ASX: VCX) is down 24%, Westfield Corp Ltd (ASX:WFD) is down 23% and Scentre Group (ASX: SCG) is down 23%. These aren't great numbers and I don't think they are going to get any better.
Here are three reasons why I'm avoiding the shopping centre REITs:
Rising interest rates
The US Federal Reserve has announced that it's going to steadily increase its base interest rate over the coming years. An increase of 0.25% doesn't seem like much, but each increase makes cash seem more attractive whilst 'defensive' assets like REITs seem less attractive.
In two years time the US interest rate could be 1% to 2% higher, this would hurt the shopping centre REITs' share prices.
The rising interest rate would also increase the interest expense for the REITs over time as the debt matures and they have to re-finance at a materially higher interest rate.
The retail sector is cyclical
Retail spending by consumers is cyclical, it rises in the good times and is hurt in the bad times. The amount of debt that households have taken on will eventually hurt other areas of the household budget.
If consumers reduce spending at the shops, that will make it harder for shopping centres to implement strong rent increases. Scentre Group reported that tenant's overall sales grew by 0.6% in the three months to 31st December 2016, the major shops in its portfolio actually saw sales drop by 0.6%.
Online shopping is going to increase
Amazon is expected to arrive on Australia's shores later this year and there are more online-only shops springing up all the time.
If online shopping really takes off, then the shopping centres and shops within them will find it very difficult to grow revenue. Although I don't think we will start seeing abandoned centres here (like in the US) any time soon, I do believe it will be a big reason why the REITs struggle from now on.
Foolish takeaway
Vicinity, Scentre and Westfield Corp do have reasonably attractive dividend yields of 6.42%, 5.16% and 3.83% respectively.
The shopping centres may be able to grow profits and distributions a little each year, but I don't think they are worth the current values. If you're a current shareholder I'd consider selling the shares and investing the capital in these three fast-growing stocks.
