Growing evidence of cyclical headwinds — We analysed the structural andcyclical headwinds the retail REITS face in Australian Retail Property: Sale ends …not so soon? (October 20). Since that time, evidence of cyclical headwinds hasstrengthened, given (1) another month of soft ABS sales growth, (2) a sharpdeceleration in tenant sales in the REITs’ September quarterlies, and (3) acontinuation of weak wage growth. Despite this, some retail landlords have ralliedas much as 5%, assisted by a c.20bp decline in bond yields. We see a salesrecovery as some way off, making a sustained re-rating of the retail REITs unlikely.    Tenant sales remain key for retail landlords … but not in the way many peoplethink — While growth in tenant sales, and retail rents, can diverge for periods oftime, we continue to believe these measures are closely linked when analysed onthe right timeframe – one that mirrors the length of tenants’ leases. Figure 1 showsthe strong relationship (correlation > 0.9) between rolling five-year sales growth,and rent growth for the retail landlords – underscoring the importance of the salesoutlook. A further 200bp slowing in retail sales growth could also reduce retail REITmultiples by 1 point, a c. 6-7% share price impact (Figure 19).

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