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Will retail vacancies hurt the Vicinity Centres share price?

rising asx retail shares and REIT prices represented by woman on escalator carrying shopping bags
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Retail vacancies are on the rise in Australian cities, but will this hurt the Vicinity Centres (ASX: VCX) share price this year?

Are retail vacancies really climbing in 2020?

They are according to an article in yesterday’s Australian Financial Review. The Australian Retailers Association says vacancy rates hit record levels of more than 20% in Melbourne’s Chapel Street and Bridge Road shopping strips.

Sydney hasn’t been immune either, with vacancies climbing in Oxford Street among other areas.

CEO of the Association, Paul Zahra, said retail strip landlords were ‘living in a different world’ and had ‘continued to hike up rents’.

So, are rising retail vacancies a red flag for retail real estate investment trusts (REITs) in 2020?

What does this mean for the Vicinity Centres share price?

Vicinity Centres shares have been under pressure in 2020. In fact, after slumping 3.7% lower in yesterday’s trade, the Aussie REIT is down 47.2% for the year. That means Vicinity is significantly underperforming the S&P/ASX 200 Index (ASX: XJO).

I don’t necessarily think rising vacancies in retail strips is a worrying sign for Vicinity Centres. The REIT owns and operates large shopping centres including Chadstone in Melbourne and DFO Homebush in Sydney.

On the other hand, it is quite likely these trends are a symptom of wider difficulties for Aussie retail. There is certainly an accelerating trend of online shopping due to the coronavirus pandemic. However, we could also see shopping centres capture some trade from retail strips if vacancies continue to climb.

So.. it’s all good news for Vicinity Centres?

Not so fast. While rising retail strip vacancies could be a minor positive for Vicinity Centres shares, there are still plenty of headwinds.

Retail REITs like Vicinity and Scentre Group (ASX: SCG) are struggling in 2020. Investors are wary of buying in with so much uncertainty surrounding operations and shopper demand on the horizon.

I think it’s hard to see a strong rebound in Aussie retail REIT funds from operations (FFO). That’s especially the case with Victoria re-entering lockdown as of last night. I’d expect to see a careful approach towards re-opening retail stores to their full capacity over the next 12-24 months.

Coronavirus restrictions are certainly a headwind for the Vicinity Centres share price in 2020. Less foot traffic means more trouble for tenants and their landlords. There’s also the unknown around consumer spending patterns in the short to medium term.

Given the Aussie REIT is trading down 47.2% this year, a significant discount has been baked into the price. However, I’m not bullish enough on retail real estate to buy in, given the uncertainty facing the industry right now.

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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Scentre Group. 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 Scott Phillips.

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