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Scentre Group stock downgraded by UBS due to cap rate pressure

EditorEmilio Ghigini
Published 05/07/2024, 09:58

ANZ
0.23%

On Friday, UBS downgraded Scentre Group (SCG:AU) (OTC: STGPF) stock, shifting its rating from Neutral to Sell. The firm also adjusted its price target marginally from AUD2.98 to AUD2.96.

The revision reflects concerns over the retail property company's operational metrics and leasing trends, which, while normalizing, are doing so at lower levels following a period of significant disruption.

UBS noted that discretionary spending is expected to continue to deteriorate, influenced by persistently higher interest rates. Despite Scentre Group's high-quality portfolio, UBS anticipates that capitalization (cap) rates will face pressure to expand, which could affect property valuations. This outlook is partly based on recent transactional evidence that suggests higher cap rates for retail properties.

The firm cited the example of Tea Tree Plaza, where a transaction pointed to cap rates higher than those in Scentre Group's books. Specifically, Tea Tree Plaza's cap rate was 7.3% compared to Scentre Group's book cap rate of 6.25%, reflecting a 15% discount to Scentre Group's 50% interest in the property. This transactional evidence suggests that Scentre Group's property values may be subject to downward pressure.

The slight reduction in the price target by UBS, approximately 0.7%, is attributed to forecast revisions and minor alterations to the Net Asset Value (NAV) valuation assumptions. This update comes as the retail property sector grapples with the economic headwinds of higher interest rates and changing consumer spending patterns.

Scentre Group, which operates as a real estate investment trust (REIT), specializes in owning and managing shopping centers in Australia and New Zealand. The company's portfolio includes some of the region's largest and most prominent retail destinations. UBS's downgrade signals caution to investors as the broader economic environment poses challenges to the retail real estate sector.

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