With the failure of the $1 billion IPO of Investa Australian Office Fund, the recovery in sentiment in the local property sector has been exposed as being rather fragile.
Not helping was the attempt by Investa, its parent, Morgan Stanley (which was also an adviser) and the other adviser, Macquarie Group, to try and sell CBD office blocks at a premium, when rival assets, and the entire property sector, are still trading at a discount to net assets.
While that implies a mere pricing problem, it also was an example of over optimism; that the recovery in the prices of listed trusts and other investors, was somehow reflecting an improvement in property values.
Far from it; all property, with the exception of housing, remains weak and extremely hesitant.
While the sector has steadied, there’s no doubt some tough hurdles remain to be surmounted before recovery can be declared and vendors can attempt to push property back onto would be buyers at a premium.
As Sydney Morning Herald columnist, Liz Knight said yesterday: "Put into the mixing pot a skittish equity market, property assets with a dubious value and some generous investment banking fees and the upshot is an IPO failure."
And after news of the failure became widely known, we saw some interesting updates from major property players, Westfield, and the first victims of the crunch in the sector, Centro Properties and Centro Retail Trust.
Westfield Group reported slower retail sales growth in Australia in the third quarter, but said conditions in its US and UK centres was stabilising.
In an update on the group’s performance in the three months to September 30, managing director Steven Lowy said he still expected operating earnings and distributions are in the range of 94 cents to 97 cents per stapled security for calendar 2009.
"Consistent with the theme we saw at the half year, there has been a continuation of solid performance in our Australian portfolio while the stabilising conditions continue in the United States, United Kingdom and New Zealand," he said yesterday.
Westfield shares rose in early trading in an initially positive response to the steadying in the troubled US market in particular.
But then investors had another think, marked the shares down from a day’s high of $12.84, to the close of $12.53.
Investors didn’t like the news that Westfield has been cutting rents in its US and UK centres to maintain occupancy, but for local store owners in its Australian malls, no sign of that.
Westfield said specialty store sales in Australia were up 2.8% in the third quarter, "reflecting lower growth for July and August followed by stronger growth in September, which was up 4.2%.
Sales growth in the first nine months of 2009 was 4.2% and confirms that the Australian economy, which Westfield left to go deeper into the US and the UK markets, is its bastion of certainty at the moment..
Despite a slower third quarter, Mr Lowy said Australia’s retail industry was in "healthy shape".
In the US, specialty store sales for the 12 months to September 30 were $US400 per square foot, down 2.4% on 12 months to the June quarter, and a massive (and margin-hurting) 12.3% lower than in the previous corresponding 12 months.
Mr Lowy said Westfield had lowered its rents in the US in order to drive up occupancy.
"On the leasing front, as part of our strategy to drive occupancy, we have continued to enter into shorter term deals where appropriate rather than locking in lower rents for today’s environment for the longer term," he said.
In the UK retail sales grew by 1.6% in the third quarter.
"This momentum has continued into October with comparable retail sales for the month up 3.8 per cent and total sales up 5.9 per cent," Mr Lowy said. "This is the strongest reported October sales for seven years."
Average rents, excluding the one-year-old Westfield London, were down 4.8% on September last year, he said, another indication of the extent of rent discounting that Westfield has been forced to do to keep its newish centres as full occupied as possible..
Across the entire group, 96.8 % of Westfield’s shopping centre portfolio was leased at September 30, down from 97.3% at the corresponding point last year.
The Australian and New Zealand portfolio had remained resilient through the economic downturn with close to full occupancy, Mr Lowy said.
In the US, 92.1% of the portfolio was leased, while in the UK it was 97.8%.
Westfield confirmed that it remains on new development holiday until at least the second half of calendar 2010, with the first new developments expected in Australia. (Where the upside obviously remains solid).
These figures will have analysts crunching their estimates for the full year. The rent discounting in the US and UK will be seen as a negative.
Centro Retail Trust had more bad news for the market (on top of the months of poor publicity about asset write-downs, bank refinancings, legal action and the like): it says it expects annual underlying profit to fall by 20% in the current financial year and net cash flow to be down 15%.
Centro said today that economic f
