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Real Estate Sector Dynamics & Code of Conduct – SCG, CHC

  • April 19, 2020 02:46 AM AEST
  • Kunal Sawhney
    CEO Kunal Sawhney
    2212 Posts

    Kunal Sawhney is founder & CEO at Kalkine and is a richly experienced and accomplished financial professional with a wealth of knowledge in the Australian Equities Market. Kunal obtained a Master of Business Administration degree from University of T...

Real Estate Sector Dynamics & Code of Conduct – SCG, CHC

The perils of the 2019 Novel Coronavirus (2019-nCov) continue, as human population remains quarantined, businesses deal with supply chain disruptions, aviation industry is at a halt and equity markets face greater volatility than ever.

In Australia, the real estate sector is no immune to the ongoing events, although in retrospect, it did sail well through the 2008 Subprime crisis and the recession of 1991. Markets run on consumer confidence that has largely been impacted as the Covid-19 crisis kicked in, sending unsettling waves across some of the fairly less susceptible sectors as well.

The consumers and businesses would now have to wait for and face delays in obtaining possession of properties while rents are being delayed due to contractions in economic activity. The adversity of impact on the real estate sector would essentially depend on how long the shutdowns last and how swiftly the businesses rebound when things get to normal. However, it is noteworthy that negative consumer sentiments impact equity markets more quickly, as these are extremely liquid as opposed to the real estate market, which mostly comprises non-liquid assets.

Interesting Read: Will Property Market Sweep Through COVID-19 Crisis?

Further, it cannot be denied that buying and selling property may not be the priority right now for consumers who are dealing with concerns around job security. The Reserve Bank of Australia (RBA) reduced the interest rates last month to 0.25%, which should ensure that credit is easily available.

For the real estate sector, it is currently a wait and see approach, but market experts believe that with eventual market recovery and improving consumer confidence, the Australian property market would be stimulated by pent up demand for housing and low cost of borrowing.

National Cabinet provides Rental Relief

On 7 April 2020, different governments in Australia met as the National Cabinet took further measures targeted towards addressing coronavirus impacts. During the meeting, a mandatory Code of Conduct, requested by landlord and tenant representative bodies from the commercial property sector, was introduced to be implemented by states and territories.

Some of the Key Features of the Code include:

  • In case of a tenant being a small or medium-sized business with an annual turnover of up to $ 50 million, the tenant would be eligible to apply for the Commonwealth Government’s JobKeeper programme.
  • Rents would be reduced proportionally based on the tenant’s loss in turnover to ensure equal sharing of burden between landlords and tenants.
  • National Cabinet has urged Australian and foreign banks as well as other financial institutions to provide the necessary support to landlords and tenants.
  • In some cases, tenants and landlords can reach a mutually agreeable agreement to compromise on the rent payments.

It is noteworthy that the Commonwealth Government is setting an example by waiving off the rents due for small and medium enterprises and not-for-profit tenants across its owned and leased property in the country.

Besides, in all Australian states, the governments gave banned rental increases while the Covid-19 crisis last.

In light of this discussion, let us look how the following real estate players are coping in these uncertain times to maintain cashflow and business buoyancy amidst in the long-term.

Scentre Group (ASX: SCG)

Scentre Group is a shopping centre company, which owns, develops, designs, constructs, and takes care of funds/asset management, property management, leasing and marketing of its retail centres under the Westfield brand name across Australia and New Zealand.

Remuneration and Liquidity Update: Recently, Scentre Group announced a Board and Executive Remuneration Update at the backdrop of Covid-19 pandemic and its impact on the Group’s operations.

  • The Company Board has agreed to a 20% reduction in base Board fees; and
  • The Senior Leadership Team including Peter Allen, Group’s CEO, and Elliott Rusanow, the Group’s CFO have all agreed to a 20% reduction in fixed remuneration.

All these changes would be effective 1 May 2020 onward with the Board reviewing these arrangements in August 2020.

At the onset of April 2020, the Group had also announced to have obtained additional unsecured bank facilities that increased the Group’s available liquidity position to $ 3.1 billion as at 1 April 2020. These additional facilities have a two-year term which would ensure further funding flexibility over the coming period for Scentre Group. Currently, the Group has $ 2.5 billion of bonds and bank facilities maturing through to 31 December 2020.

On a further positive note, in March 2020, Australia’s Prime Minister, Hon Scott Morrison MP had announced that shopping centres are ‘essential activities’ and therefore, Scentre Group’s Westfield centres, which include supermarkets, grocery stores, food markets and retail stores have been kept open to assist the community in dealing with the response to the Covid-19 pandemic, according to a company update in mid-March 2020.

Stock Information: With a market cap of ~ $ 10.69 billion, the SCG stock settled the day’s trade higher at $ 2.150, edged up 4.37% with ~ 43.16 million shares traded on 17 April 2020.

Charter Hall Group (ASX: CHC)

Charter Hall Group is another key fully integrated real-estate player in Australia with over 29 years’ experience in property investment and funds management including access, deployment, management, and equity investment across its core sectors being office places, retail assets, industrial as well as social infrastructure. The Group has as high as $ 38.9 billion worth portfolio of over 1,100 high-quality, long-leased properties with a $ 6.8 billion development pipeline.

On 25 March 2020, the Group announced to have received the final Charter Hall Office Trust (CHOT) performance fee of $ 148 million, which led to an increase in Charter Hall Group’s available balance sheet liquidity to ~$ 350 million with a gearing of 2.8%. The Group’s weighted average debt maturity is 6.3 years.

As per Group MD and CEO, David Harrison, the latest receipt of funds demonstrates the successful investment outcome that CHOT fund investors have witnessed while it also gives a testimony to the Group’s success in securing investment opportunities.

Amidst the Covid-19 circumstances, Charter Hall Group also reaffirmed its FY20 earnings guidance which estimates the post-tax operating earnings per security (OEPS) growth to be nearly 40% higher than that recorded in the prior year FY19. Besides, the guidance for financial year 2020 entails $ 98 million of the $ 148 million CHOT performance fee, of which around $ 50 million were recognised as part of the FY19 earnings.

Stock Information: With a market capitalisation of $ 3.38 billion, the CHC stock settled the day’s trade on 17 April 2020 at $ 7.750, edged up 6.89% by $ 0.500.

Also Read Staying Positive while ABS Talks About COVID-19 Driven Impact on Businesses

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