Shopping centre giant Westfield Group (WDC.AX), founded and run by billionaire Frank Lowry, has released its full-year results showing a meagre 3% rise in underlying earnings before interest and tax. Lowry has done a superb job of building Westfield into a business with a commanding domestic market share with an increasing portfolio of sought-after properties in major global cities including London and San Francisco. Due to the high level of foot-traffic Westfield’s malls attract, Lowry and his team have for many years been able to price rents to extract maximum dollars from their tenants. However, the results just released show that the Australian market, which accounts for roughly half of Westfield’s business, is struggling, with management stating that rents for new tenants were being negotiated at lower levels.
Insights from Westfield’s results
For Westfield and its listed peers, including Stockland (SGP.AX) and GPT Group (GPT.AX), rent increases are becoming tougher to implement, and some rents are even decreasing. This will make achieving growth a tough ask and is one reason investors should be weary of paying a high multiple for the stocks.
For retailers (the tenants), rent decreases are a welcome relief. While anchor tenants, such as Woolworths (WOW.AX) and cinema operator Village Roadshow (VRL.AX) have always been able to negotiate favourable rents with shopping centre owners, due to their sheer people-pulling power, smaller retailers such as Country Road (CTY.AX) and Kathmandu (KMD.AX) have been at the mercy of landlords who have always squeezed as much out of their less powerful tenants as possible.
One of the traits of successful investors is their ability to see opportunities amongst the noise and chaos of the share market and the economy. While shopping centre owners may be experiencing some difficulties on the rent front, this could provide opportunities for some nimble and clever retailers — and likewise opportunities for some nimble and clever investors.
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