Leasing scheme warning as Scentre shuts 129 Mosaic Brands stores
The powerful property industry has warned that an extension of the Morrison government’s leasing code for small tenants until March next year could see the overall cost of the scheme blow out to about $15bn.
The caution comes as Scentre Group, owner of the local Westfield empire, last week boarded up about 129 stores run by Mosaic Brands, owner of the Noni B, Millers, Rivers, Katies, Crossroads and EziBuy brands, that sit outside the code.
The parties declined to comment but the dispute escalated from Tuesday when Scentre demanded payment of outstanding rent and the chain was locked out of 24 stores, with the remainder also temporarily closed on Wednesday night.
The stand-off between the chain and shopping centre owner demonstrates both sides are taking hard-line approaches as landlords try to prevent chains from locking in more permanent shifts to turnover based rental structures.
An extension of the leasing code is being considered by the federal cabinet, which is under pressure from retailers who have warned of more store closures unless they can access further rental relief and job support packages are extended.
The commercial tenancy code is not on the agenda for national cabinet on Friday but could be raised by state governments as the issue is impacting their economies.
The $15bn costing by Deloitte Access Economics is in a Property Council briefing paper obtained by The Australian, that has been submitted to the federal government as tensions between landlords and retail chains also escalate.
It also comes in the wake of Victoria extending its rental relief scheme to year end as retailers scramble to stay in business in the wake of the state’s tough lockdowns.
However, concerns have been raised as major listed landlords, including Vicinity Centres and the GPT Group, about the sustainability of longer rental relief for small businesses under the existing code at the same time as larger chains are also pushing to close stores and cut rents.
Extending the Morrison government’s code has become a key flashpoint and Property Council chief executive Ken Morrison said it had been introduced in “extraordinary circumstances” in April, when businesses were being forced to close under government direction to stop COVID-19 spreading.
“Extending the code now would be disproportionate. The code is unlike any government measure enacted on one sector of the economy in modern Australian history. No other advanced economies around the world have made a single sector disproportionately shoulder the cost of recovery,” he said.
The Deloitte analysis showed an extension of the code of conduct by state and territory governments would impose an extra $4.8bn in costs on commercial property owners and threaten the viability of many small and mid-sized commercial property businesses.
It estimated the impact of the leasing code on commercial landlord revenues for the five-month period from April to September was at least $4bn for tenants under the code. This would rise to $8.8bn if the code is extended to March next year, equating to a 10 per cent fall in annual industry revenue.
But in reality, rent relief is being granted to many businesses outside the original code. Taking these additional rental waivers into account, the cost to commercial landlords from April to September was an estimated $6.8bn, rising to $14.9bn over an 11-month period, or a 17% fall in annual revenue.
The battle between shopping centre owners, who have already had billions of dollars wiped off the value of their properties as a result of the first wave of the coronavirus, is sharpening as the prospect of a deeper recession looms.
A recovery in visitation is underway as shoppers return to malls in states that have lifted restrictions but rents are under pressure from rising vacancy levels and the prospect of more chains going into administration.
Noni B is owned by Mosaic Brands.
Vicinity, co-owner of Melbourne’s massive Chadstone shopping centre, this week called for the eligibility criteria on the code to be tightened to businesses with a turnover of up to $10m, rather than $50m, and for strict time limits to apply.
Vicinity chief executive Grant Kelley said the retail property sector was bearing a very high burden for Australia during the lockdown and the company was pushing for any extension of the code to be for a limited time. “We need to ensure that we provide rental relief to those most in need,” he said, adding relief needed to targeted by sector.
“We want to ensure that we don’t get to a point where, because we’ve perhaps been misdirecting rental relief, we put our own company at risk and under pressure,” he said.
GPT also pushed against extending the code. “We don’t really think there’s a need for that,” GPT chief executive Bob Johnston said. “I think market forces should be allowed to play out and allow ourselves, the landlords and the tenants work through this together.”
Morrison argued that while the code may have been justified during the initial phase of the pandemic it effectively involved one part of the business community — many of them small owners — being legally obligated to give money to another part of the business community.
He urged governments to focus on the recovery across most of the country. “In most jurisdictions the worst of the pandemic is clearly behind us and the economy is reopening,” he said.
The property industry also warned of a spillover from extending the code as it could add billions of dollars in costs for property investors, with potentially serious consequences for the financial system.
Morrison said the financial impact of the code was felt by commercial property owners and investors, ranging from major listed real estate investment trusts, mid-tier and private property groups, self-managed super funds and retail investors.
“Clearly, the risk is greatest for smaller to medium sized owners and investors who may have more debt and weaker balance sheets,” he said. “These property owners are potentially also more exposed to domestic banks for lending with higher gearing ratios and at greater risk of breaching debt covenants.”
This article originally appeared on www.theaustralian.com.au/property.
