Structural changes stemming from the coronavirus pandemic are driving Australian REITs to transform their portfolios to meet changing demands of their tenants, according to a new report from Fitch Ratings.

The US credit rating agency’s report said despite Australia successfully managing the pandemic better than other countries around the globe, the stringent lockdowns and ongoing social distancing restrictions have changed consumer and employee behaviour.

“Major Australian REITs have adapted well – occupancy levels across portfolios stabilised in 2H20 from June 2020 and retail rent collections improved,” the company said.

Weakling rental rates in office and retail is expected to be the biggest challenge for the major Australian REITs, but Fitch suggests the high quality of their portfolios will protect them from rising vacancies.

“Retail portfolios will see the most change over the short to medium term as the sector continues to grapple with online sales growth,” the company said.

“We expect retailers to streamline their store networks in 2021 – and we believe this will see a ‘flight-to-quality’ as they seek to tap the higher footfall and other amenities that better-quality malls provide.

“This will support occupancy across the major REITs’ portfolios, but is still likely to lead to some weakness in rents.”

Changes in the office sector will be slower to materialise due to the longer weighted asset lease expiries.

“Overall structural demand will fall as businesses permanently utilise flexible working arrangements, though the fall will be limited by offices’ vital role as places of collaboration and demand for better health amenities,” the company said.

The industrial sector will contrast trends in retail and office space, with the sector set to benefit from increasing online sales and higher inventories as businesses seek to avoid supply-chain disruptions.

“We expect industrial property development to rise, though this may be moderated by limited land supply and environmental considerations.”

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