Damage to A-REITs Could ‘Run Deep’

The damage from the coronavirus crisis could run deep for REITs as government measures to contain the spread continue to hurt industries that rely on discretionary consumer spending.

S&P Global Ratings now rates about 27 per cent of Australian and New Zealand REITs as negative, with many shopping centre landlords expected to be hardest hit as retailers demand rent waivers, deferrals, or concessions to ride out a recession.

S&P also warn the pandemic may accelerate a structural shift toward e-commerce and remote working, undermining retail and office REITs irreparably.

Retail trusts including owners of destination assets such as Westfield and Vicinity Centres, and neighbourhood mall owners Shopping Centres Australasia Property Group and Charter Hall Retail REIT, have since withdrawn guidance.

Many have cited the escalation in uncertainty surrounding the impact of Covid-19 on operations, shifting focus away from earnings and distributions.

S&P Global Ratings Economic Outlook - Australia

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S&P noted that worsening financing conditions could hit real estate companies, given their heavy reliance on capital markets despite the REIT sector holding a much stronger liquidity position entering this outbreak compared to the global financial crisis.

It expects real GDP to decline by 4.0 per cent in Australia and 5.0 per cent in New Zealand this year, before rebounding in 2021 to 5.7 per cent and 6.0 per cent respectively.

“The retail sector's asset values have already significantly dropped, while the effect on office and industrial space is more moderate,” S&P analyst Craig Parker said.

The rating agency pointed to GPT Group's asset revaluations, which resulted in the book value of its Wholesale Shopping Centre Fund falling by 11 per cent compared to its Wholesale Office Fund which decreasing by 2 per cent as of March.

Similarly in New Zealand, where the population has been subject to a stringent lockdown, Kiwi Property Group's book value fell by an overall 8.5 per cent.

S&P highlighted that office landlords leasing to governments, large corporates, and multinational tenants would be more protected than the retail sector given their tenants' ability to operate in a “work from home” mode and generally stronger creditworthiness than retailers.

Despite this, recessionary conditions are expected to soften leasing demand across all major central business districts with vacancy rates to rise in CBD markets, pushing down rents and increasing leasing incentives to entice tenants.

The ratings agency also cautioned industrial investment in line with tenants exposed to imported goods and logistics contracts supporting discretionary retail.

Recent Rating Actions On Australian Retail REITs

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“The real estate sector is highly capital intensive and relies heavily on debt capital markets,” Parker said.

“Importantly, however, all rated REITs in Australia and New Zealand have either strong or adequate liquidity.

“The REITs have sufficient cash and undrawn bank lines to meet bank and bond debt maturing over the next 12 months.

We believe this reflects their more disciplined approach to liquidity “management following the global financial crisis.”

Both Scentre Group and Stockland recently tapped their existing euro medium-term note programs with Scentre placing a 10-year Hong Kong dollar HK$400 million issuance, and Stockland successfully placed a 10-year HK$805 million issuance.

Amid turbulent market conditions, Scentre Group and Stockland also put in place additional unsecured bank debt facilities of about $1.5 billion and $350 million, respectively.

“Furthermore, rated REITs have sufficient headroom within their debt covenants,” Parker said.

“However, we expect REITs' loan-to-value covenant to face pressure with falling book values of their assets.”