Should you be avoiding Shopping Centre stocks?

Pressure is growing on our listed shopping centre operators with news that a fast food franchise may be pulling up to 14 stores from malls owned by Westfield Corp Ltd (ASX: WFD).

SumoSalad has placed two leasing entities into voluntary administration according to the Australian Financial Review, and that is likely to impact between 12 and 14 of its outlets after the health food franchisor failed to reach an agreement on rent with Westfield.

This is bad news for the sector as some experts believe SumoSalad’s woes are part of a greater systemic issue plaguing retail property companies following the high profile collapse of retailers like Topshop Australia and Pumpkin Patch.

Australia is in a retail recession and the outlook for brick and mortar shops are bleak with US online shopping behemoth Amazon setting up shop on our shores.

Tenant advocacy groups believe that unless shopping centre operators are more flexible on leases, more food and retail outlets could shutter up.

Many retail property stocks have been underperforming with Westfield down close to 20% over the past 12-months as Vicinity Centres Re Ltd (ASX: VCX) fell 13% and Scentre Group (ASX: SCG) declined 8%  when the S&P/ASX 200 (Index:^AXJO)(ASX:XJO) Index is up nearly 12%.

Yields are looking attractive but the uncertain operating outlook means some could turn into yield traps. But this isn’t to say there are no interesting opportunities in this space even though I think an underweight position is warranted.

Stockland Corporation Ltd (ASX: SGP) could be one interesting opportunity to watch ahead of its investor day tomorrow. Citigroup believes that management could announce the sale of some of its retail assets given that Stockland has around $1 billion worth of “non-strategically aligned” assets on its book.

This could prove to be a positive catalyst for the stock, which is trading on Citigroup’s FY18 forecast yield of 5.6%.

What’s more, Stockland’s shopping centres have one of the longest weighted-average lease expiry (WALE) among its peers and that should give investors some comfort about the sustainability of its dividend.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. 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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