While the industry’s average leverage ratio is a manageable 21%, UBS says more attention will be paid to metrics such as interest coverage ratios.
S&P Global Ratings’ senior director of global ratings, Craig Parker, said Australian REITs were “adjusted” to the rising cost of debt and, therefore, had a high proportion of fixed funding and a maturity profile. “smooth” debt.
But he said while industrial assets held up well, all REIT sectors “have their challenges in a rising interest rate environment.” CBD retailers continue to struggle, while CBD office owners have been forced to offer “significant” incentives to tenants.
Wilsons warns that “structural issues” within office and retail REITs are likely to be exacerbated by an economic downturn, “our preference is to invest in sectors with structural tailwinds and defensive earnings, such than logistics and healthcare REITs”.
Still, the growing headwinds have yet to be reflected in the outlook statements of major REITs to date. Goodman Group reports “tight supply and demand” across its $69 billion industrial-focused global portfolio.
Outgoing Scentre Group Chief Executive Peter Allen reports that shopping center occupancy was 98.7% at the end of March.
“Given improved conditions and strong business performance, earnings are expected to grow more than 5.3% in 2022,” Allen said.
Stockland highlights continued “elevated” demand, but warns that conditions should moderate over the medium term “in line with rising interest rates”.
Meanwhile, Morgan Stanley real estate analyst Simon Chan is signaling the prospect of a series of share buybacks, as well-capitalized REITs attempt to exploit any unwarranted net asset discount.
He said while some REITs have heavily promoted their project development capability, they could add more value by buying more of their existing assets at low prices.
“Six large REITs have reached the point where they are trading at a 15% discount to their gross book value on a [deleveraged] base,” he says.
Quay Global Investors agrees that the valuation of REITs now means that their assets are priced below replacement cost, which deters developers from introducing new offerings in an already undersupplied market.
“Excess demand over limited supply pushes up rents and values until the development cycle can begin again – where prices are above replacement cost,” says portfolio manager Chris Bedingfield.