Like many REITs elsewhere, Australian commercial property companies rated by Standard & Poor’s are emerging from the global financial and economic crises with stronger balance sheets and improved risk profiles. Over the past few years, the sector has dramatically reduced its debt appetite, undertaken sizable equity raisings, adopted more conservative distribution policies, and reverted to “back to basics” investment strategies and business models. At the same time, several REITs have elected to operate substantial excess liquidity in the form of undrawn but committed bank facilities to provide a buffer from further unexpected shocks to asset values and take advantage of acquisition opportunities as they arise. Finance teams, mindful that they do not want to be overly reliant on the bank market for funding, have also been active in raising debt in the bond markets. Consequently, many rated A-REITs have reduced their bank exposure and lengthened their debt-maturity profiles.
We view these latest trends as positive for the credit quality of the rated Australian REITs sector, which remains largely entrenched in the investment-grade rating category. Nevertheless, there are some potential negative credit events that may pressure the ratings. REITs, with balance sheets largely back in order, may be tempted to pursue more aggressive business and financial strategies, including sizable debt-fund acquisitions. Although REITs have been able to maintain occupancy levels in recent years, companies may also face rental and asset underperformance amid weak economic and market conditions. Refinancing problems may also re-emerge as a concern for liquidity.
To see the report, Industry Report Card: Asia-Pacific REITs Return To Debt Capital Markets As Confidence In The Sector Builds, click here.