Trusts put faith in high-end retailers to drive growth

INTERNATIONAL retailers and new leases will underpin real estate investment trusts as they head into the Christmas/New Year business lull.

By InvestSMART · 31 Oct 2012

By InvestSMART ·
31 Oct 2012

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INTERNATIONAL retailers and new leases will underpin real estate investment trusts as they head into the Christmas/New Year business lull.

In quarterly reports from GPT, Commonwealth Property Office Fund (CPA), CFS Retail Trust and Mirvac, among others, the theme has been of steady leasing deals to keep income coming in.

The focus on high-end international fashion labels has led to a rise in development costs for the CFS Retail Trust's Emporium project in Melbourne. But the forecast higher sales revenue generated when the property opens, by December 2013, will offset the initial higher charges, according to the trust's September quarter update.

The fund manager for CFS Retail, Michael Gorman, said the project costs were expected to increase marginally, from $560 million (CFS's share) to $575 million, and the target yield was forecast to be more than 5 per cent rather than above 6 per cent.

Mr Gorman said the trust's comparable shopping centre portfolio increased sales by 3.5 per cent over the period, while specialty store sales rose by 4.4 per cent.

"The joint owners [CFS and the Government of Singapore Investment Corporation (GIC)] of the Emporium have decided to take advantage of the strong demand for luxury and international flagship stores and to increase the exposure to these retailers considerably," he said.

Brokers at Goldman Sachs said they have maintained their view that "risks continue to prevail around the large Emporium project, and until the outcomes can be proven we see a likelihood that investors will increasingly price some discount until the development completes in a little over 12 months".

For office leasing, sentiment is getting stronger along the eastern seaboard.

The fund manager for CPA, Charles Moore, said the new lease by law firm Ashurst for 44 per cent of the proposed 5 Martin Place project in Sydney would help to offset a drop in valuations at 10 Shelley Street, at King Street Wharf in Sydney, due to the departure of KPMG in 2016 to Barangaroo.

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Frequently Asked Questions about this Article…

What is underpinning real estate investment trusts (REITs) as they head into the Christmas/New Year period?

According to recent quarterly updates, international retailers and new leasing deals are underpinning real estate investment trusts. Funds such as GPT, Commonwealth Property Office Fund (CPA), CFS Retail Trust and Mirvac reported steady leasing activity to help keep income flowing through the seasonal lull.

How will the CFS Retail Trust’s Emporium project in Melbourne affect investors?

CFS Retail Trust says the Emporium redevelopment will boost sales revenue once it opens (targeted for December 2013), which should offset higher upfront development charges. The trust expects marginally higher project costs but forecasts a solid yield, and it has increased exposure to luxury and international flagship stores with joint owner GIC.

Are the reported increases in Emporium development costs a major concern for investors?

The fund manager, Michael Gorman, described the cost rise as marginal—CFS’s share moving from $560 million to $575 million—and expects higher sales to offset the extra charges. However, brokers at Goldman Sachs warn that risks around the large Emporium development persist and that investors may price a discount until outcomes are proven.

How have sales performed across CFS Retail Trust’s shopping centre portfolio recently?

CFS reported that its comparable shopping centre portfolio increased sales by 3.5% over the period, while specialty store sales rose by 4.4%, highlighting ongoing consumer demand at its assets.

What is Goldman Sachs’ assessment of the Emporium development risk?

Goldman Sachs brokers maintain that risks continue to prevail around the large Emporium project. They expect investors may increasingly price some discount until the project’s outcomes can be proven and the development completes in the coming months.

What is the outlook for office leasing along Australia’s eastern seaboard?

The article notes that sentiment for office leasing is getting stronger along the eastern seaboard, with major funds reporting improved leasing momentum in their quarterly updates.

How does the new Ashurst lease affect Commonwealth Property Office Fund (CPA)?

CPA’s fund manager, Charles Moore, said the new lease by law firm Ashurst for 44% of the proposed 5 Martin Place project in Sydney helps offset a drop in valuations at 10 Shelley Street (King Street Wharf) that resulted from KPMG’s planned 2016 move to Barangaroo.

Which property trusts highlighted steady leasing deals in their quarterly reports?

Quarterly reports from GPT, Commonwealth Property Office Fund (CPA), CFS Retail Trust and Mirvac, among others, emphasised steady leasing deals as a theme to keep rental income coming through the period.