GPT Yet to Solve Headache of Downward Pressure on Retail Rents. FVE Unchanged at AUD 5.40

GPT Group’s first-quarter operational update confirms our view of a challenged environment for retail property landlords. Total sales for tenants in the shopping centre portfolio were up only 1.3% in the year to end March, pointing to a significant slowing on the 2.4% growth for the year to December 2018. For the high rent-paying specialty tenants, operating performance was similarly weak. Trailing 12-month specialty sales growth was 1.9% at end March, versus 3.6% at end December 2018. Prepared comments from GPT that retail conditions remain subdued is quite an understatement, as it appears Australian households have significantly tightened the purse strings over the past three months. Against this backdrop of slowing sales, we don’t see GPT or other landlords orchestrating a rebound in rent growth. We’ve been factoring a soft outlook for retail rents in our forecasts for some time and continue to forecast rents rising by 2.3% over the longer term. This is roughly half the average fixed increase of 4.7% GPT has been negotiating on recently finalised retail leases. However, having a swag of leases with high fixed annual increases doesn’t tell the full story as to achieve this GPT needs to separately pay large inducements, or tenant incentives. In 2018, tenant incentives across the office, retail and industrial portfolio were AUD 61 million, equivalent to 10.6% of net rental EBIT.