REITs could feel pinch of credit crunch hits

Top Australian REITs have issued $75 million of debt

REITs could feel pinch of credit crunch hits

Top Australian real estate investment trusts could be exposed if a credit crunch hits, according to an analysis by Morgan Stanley.

Top REITs have issued $75 million of debt, The Australian reported. Even large landlords that own major buildings and shopping centres could feel the pain from tight finance markets with commercial real estate lending under pressure offshore.

For the moment, however, the situation in Australia isn’t dire, The Australian reported.

Morgan Stanley property analysts Simon Chen and Laura Berry warned that global financial market volatility could cause access to capital to come under pressure. They said that many listed groups are putting assets on the market and accepting offers on key buildings, The Australian reported.

“We are concerned that access to financing may be an emerging issue in the commercial real estate sector,” Chen and Berry said in their analysis. “After all, in other parts of the world such as the US, cost of debt in commercial real estate has spiked materially, whilst the number of lenders participating in the space has declined.”

Morgan Stanley said that most REITs had a gearing covenant at 50% and an interest coverage ratio covenant at two times, so they’re currently not under stress from a leverage perspective, according to The Australian.  However, as the cost of debt goes up and cheap hedging rolls off, interest coverage ratios will likely deteriorate.

“For now, no REIT looks to be in real trouble, and less debt market pressure persists into the medium term,” Chen and Berry said in their analysis.

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The Morgan Stanley analysts said that REITs have a large amount of undrawn bank debt, likely as a bulwark against the risk of a credit crunch.

In recent months, US lenders have been apprehensive about commercial properties amid asset value declines and loan defaults, The Australian reported.

“There has been no signs of that in Australia, but it’s worth noting that across our coverage, 44 per cent of total available facilities are sourced from offshore, with 27 per cent from the US and 11 per cent from Europe,” the analysts said.

REITS also aren’t immune from interest rate pressures at home. The pressure of 10 consecutive cash rate hikes has caused REITs and other players in the commercial space to retreat somewhat due to the difficulty of predicting accurate investor returns.

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