Specialty stores under pressure

Also forecast is a rise in bankruptcies if conditions in the retail sector deteriorate further.

At most risk are specialty stores, which pay higher rents within a shopping centre than the "anchoring" department store chains.

Despite the profit warnings issued by all retailers and the gradual decline in the government's retail sales data, the retail property sector was viewed as being immune to the risks due to the long-term nature of lease contracts.

However, as more tenants move into bankruptcy or are forced to close, the pressure is now mounting on landlords. Most of the big shopping centres in Australia are owned by trusts, including Westfield, CFS Retail, Stockland and GPT.

Matthew Bertram and Ian Randall, research analysts at Deutsche Bank, advised in a note to clients that recent profit guidance from several listed retail groups has increased investor concerns on both the outlook for the discretionary retail sector and the flow-on to the Australian real estate investment trust retail portfolios.

"Whilst for most A-REITs exposure to turnover-based rent is not material, the risk to retail portfolio income streams lies in: the level of rent achievable on renewals/re-leasing; potential occupancy declines (in part driven by tenant failure); and potential for development returns to fall short of targets," the Deutsche Bank researchers said.

"As a sensitivity, we have allowed for a 200 basis point reduction to portfolio occupancy for all A-REIT retail portfolios (equating to additional specialty vacancy of 250-480 basis points across portfolios) and rental declines on releasing of up to 10 per cent.

"Such a scenario would see our 2013 financial year earnings per security estimates down by between 1.6 per cent for Stockland and 7.1 per cent for Westfield Retail Trust."

Mr Bertram said that in the event the second half of the year remains fragile, "in our view the risk would be for a further round of specialty bankruptcies/corporate failure".

"We expect the most likely time frame for material bankruptcy risk would be February 2012," he said. "While for David Jones the sales clearance period in June-July is a significant profit driver, for a number of smaller specialty tenants the Christmas trading period will likely be the key contributor to profit."

One bright light is that A-REIT portfolios are insulated in the near term from negative market rental growth due to the lease structures in place. Most leases are fixed for five years, with a 5 per cent rise; others may be reviewed more frequently, with a rise of the CPI rate plus 2 per cent.

Simon Wheatley, the executive director of real estate investment research at Goldman Sachs, said the slump in consumer sentiment last week, combined with the David Jones downgrade and commentary that the present retail conditions are unprecedented, have led him to take a negative view of the sector.

"Further, weakness in house prices is likely to undermine confidence and consumers' willingness to spend," Mr Wheatley said.