Among all the ASX shares, the real estate investment trusts (REITs) have had a pretty tough year. For example, shopping centre REITs have carried much of the costs of the coronavirus lock downs with little compensation. The government’s code of conduct for commercial landlords has bound the hands of shopping centre owners in several areas.
First, they cannot evict tenants who don’t pay rent during the coronavirus period. Second, they are bound to offer waivers and deferrals up to 100% of rent owing, and no less than 50%. Hence, shopping centre owners have dramatically reduced revenues, reduced or eliminated dividends, and the companies share prices have fallen off a cliff.
Coming back soon
There have been a few indications that ASX retail shares are due for a rebound. First, in a press release on 21 August, The Property Council of Australia released information from Deloitte Access Economics. This showed that the national impact on shopping centres from April to September had been around $6.8 billion. Moreover, this would rise to $14.9 billion if extended to March 2021.
Second has been the recent rental agreement feud between Scentre Group (ASX: SCG) and Mosaic Brands Ltd (ASX: MOZ). This finally ended in an agreement after Scentre shuttered all of the Mosaic Brands stores nationally.
The positive news in all of this is that shopping centres are starting to take back control of their assets. Not only that, but they are already beginning to lobby to avoid the code being extended to March, 2021.
The future of ASX REIT shares
In its annual report, Scentre said it expects to lose between 300–500 shops. Moreover, the move to online shopping by consumers during the pandemic has been well documented. While it is unclear how much of this will remain after knockdowns, it is clearly an acceleration of a longer term trend.
In response to this, companies like Scentre, the owner of the Westfield shopping centres, have accelerated strategic initiatives. For example, Westfield Direct is a program to provide centralised, drive-though, click and collect services for its retailers. There are currently 14,000 products from 590 retailers. Another initiative is the app based loyalty program Westfield Direct.
Services like click and collect are not possible without physical stores, and Scentre is embracing this trend. Meanwhile, ASX shares like Vicinity Centres (ASX: VCX) are doubling down on its core capability. Vicinity has embraced analytical technology, and has built an in-house platform to optimise tenant selection for leasing, and a retailer insights product to partner with retailers to drive performance and sales.
Foolish Takeaway
Scentre Group is trading at an estimated price to earnings (P/E) ratio of 8.3 based on FY19 earnings. It also has a current trailing 12-month dividend of 8.83. Vicinity Group is trading at a P/E of 4.42 with a trailing 12-month dividend of 11.7%.
Both of these ASX REIT shares have cancelled dividends in the near term. In addition, they still face 50 miles of hard road. Nevertheless, the sector looks like it is about to regain control of its assets. I think this is a very unique and limited chance to buy really good ASX REIT shares at very cheap prices.
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Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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