Don’t bet on a big reopening rebound for ASX 200 retail landlords: Macquarie

Shopping malls are eagerly awaiting the lifting of restrictions. But the reopening may already be priced into their shares.

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S&P/ASX 200 Index (ASX: XJO) retail landlords were among the hardest hit when COVID-19 swept across Australia in early 2020.

Shoppers were forced to remain at home. And stores in the landlords’ malls (rent-paying tenants) had no choice but to shutter their operations.

In the broader market panic-selling that ensued, ASX 200 retail landlords saw more than half their value evaporate in a matter of weeks.

The Vicinity Centres (ASX: VCX) share price, for example, crashed 62% from 31 January through to 27 March. Scentre Group (ASX: SCG) suffered an almost identical loss, falling 61% over that same period.

Granted, almost every ASX 200 share was heavily sold off during the pandemic fire sale. Yet the index ‘only’ lost 31% from 31 January through to 27 March. Half the losses suffered by Scentre and Vicinity.

Enter the vaccines

Both Vicinity and Scentre Group then enjoyed some of the sharpest rebounds late last year. That came after news of effective COVID vaccines, which had ASX 200 investors positioning themselves for the reopening.

Vicinity’s share price surged 45% from 30 October through to 7 December. Scentre Group’s rebound was almost as strong, with shares gaining 40% over that same period.

The ASX 200 retail landlords suffered more during the early 2020 panic-selling but gained more in the post-vaccine reopening jubilance. Their rebound was more than triple the 13% gain of the ASX 200 from 30 October through to 7 December.

Now, with Australia on track to hit 70%-plus vaccination levels soon, the big shopping malls in locked down cities are getting ready to fully reopen to the public, non-essential services and all.

Again, this has investors pondering if shares like Scentre and Vicinity will put in a repeat performance.

Reopening rebound for ASX 200 retail landlords could be soft

While the big retail landlords are still trading well below their pre-pandemic levels, much of the pending reopening could already be priced into their shares, according to analysts from Macquarie.

Macquarie is cautious on the rebound outlook for shares like Scentre and Vicinity after analysing the performance of large-cap retail landlords in the United States and the United Kingdom. Both nations are months ahead of Australia on their reopening roadmap.

The Australian Financial Review reports:

Major mall owners abroad, including Hammerson in Britain, Unibail-Rodamco-Westfield in Europe and the Simon Property Group in the US, have surged strongly in the lead-up to reopening compared with industrial landlords, but underperformed the same stocks once reopening was under way, the analysts noted.

As the old investor adage goes, if it’s in the news, it’s in the price. And investors have been bidding up the share prices of the ASX 200 retail landlords well before many of their tenants will be able to fully reopen for business.

Macquarie’s analysts did potentially see “some upside in valuations for large-cap mall landlords”, but much of the rally has already come and gone.

The Macquarie analysts wrote:

In addition, moving from pandemic to endemic means learning to live with the virus, which may result in additional challenges for retail landlords. … We view outperformance from here will rely closer on fundamentals, which in our view, will remain challenged.

Analysts at BIS Oxford Economics also offered a muted outlook for ASX 200 retail centre shares.

Oxford was quoted in the Australian Financial Review:

A solid rebound can be expected when restrictions are lifted, but the pandemic has done lasting damage to centre incomes, and we expect it will take four to five years for pre-virus incomes to be regained in regional and subregional centres.

Neighbourhood centres are more resilient but will still suffer losses until financial year 2023. Once the pandemic effects are worked through, we’ll return to the fundamental challenges facing retail, namely the threat from the growth of online shopping and changing consumer spending patterns, [to] less on goods sold by traditional shopping centre tenants.

How have ASX 200 retail centre shares performed this year?

Vicinity Centre’s share price is up 8.4% in 2021 and up 9.1% over the past month. It is trading at $1.74 currently.

Scentre Group’s share price is up 8.1% year to date and up 17.8% over the past month. At the time of writing, Scentre is trading at $3.01.

By comparison, the ASX 200 is down 1.5% over the past month.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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