Lesser Debt Appetite Pushes Australian Real Estate Investment Trust Back to Basics

September 10, 2011 / Elizabeth Buckley, Commercial Property Analyst

Commercial property firms in Australia rated by Standard & Poor’s are emerging from the global financial and economic crises with “stronger balance sheets and improved risk profiles” like many real estate investment trusts (REITs) elsewhere, according to an expert.

Lesser Debt Appetite Pushes Australian Real Estate Investment Trust Back to Basics

“Over the past few years, the [real estate] 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,” said Craig Parker, Director, Corporate Ratings, Standard & Poor’s Ratings Services.

At the same time, several investment trusts have selected 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, Parker added.

Finance teams, who are aware that they do not want to be reliant on the bank market for funding, have been raising debt in the bond markets, resulting in many rated A-REITs to 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,” Parker said.

Nevertheless, there are some potential negative credit events that may pressure the ratings. For example, investment trusts 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,” Parker said.

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