This article is from the Australian Property Journal archive
AUSTRALIA’S commercial real estate is vulnerable to the economic downturn caused by the coronavirus pandemic. Yesterday Mirvac wrote down $349 million from its retail assets but analysts said the listed property sector has sufficient buffers to withstand property value declines.
According to Fitch Ratings, the CRE sector is the third-largest business exposure of Australia’s four major banks and is vulnerable to economic and employment shocks.
Fitch expects impaired loans for commercial property, which totalled 0.2% for the major banks at end-March 2020, to rise over the next two years as a result of the economic downturn. The major banks’ impaired loan ratio for CRE peaked at 4.2% in September 2010 – the time following the 2008 global financial crisis – from 0.2% pre-crisis.
However, Fitch said the CRE portfolios were in better shape prior to the pandemic than before the 2007-2008 global financial crisis, with proportional exposure to CRE falling over the last decade.
The banks have also shifted away from development and land-bank exposures, which have a higher risk profile.
“We expect loan performance to differ this time, due to the lower risk appetite for CRE heading into the downturn. The major banks’ exposure to CRE has been broadly stable over the previous five years. Growth in the segment has largely been met by the local branches of foreign banks, where total exposure has risen by almost threefold.
“Among the four banks, National Australia Bank had the highest CRE exposure in 1Q20, with 8.2% of exposure at default; the exposure of the other three banks ranged from 6.2% to 6.6%,”
It said the major banks’ office-space exposure accounts for around 29% of CRE, consistent with 2008 levels. Exposure to retail property has increased substantially to 26% of total CRE exposure in 2020, from 16% in 2008.
“This sector has faced increasing challenges over a number of years, exacerbated by the current downturn. We also expect tourism and leisure to be heavily affected by the downturn, but the major banks have low direct and indirect exposure this sector through CRE.”
Fitch believes structural changes in consumer and business behaviour, such as remote working and online purchasing, could increase vacancy rates, lower asset values and reduce volume growth in the long term.
Moody’s is predicting retail AREITs will experience the largest declines in property values. Although it said most rated property trusts have good gearing buffers to withstand property value declines.
Yesterday Mirvac revealed its retail property portfolio valuation declined by $349 million or 9.9% in the second half of 2020, which offset a $13 million gain in industrial and $23 million increase in offices. It also announced its distribution for FY20 is 9.1 cents per stapled security, which is below the previous guidance of 12.2 cpss and 11.6 cpss in FY19.
Mirvac’s CEO Susan Lloyd-Hurwitz said COVID-19 has transformed the world in the space of a few short months.
“No sector has been untouched by the health and economic crises that have developed. These are unprecedented times and Mirvac is taking necessary measures to address these challenges including appropriate capital management. Mirvac’s purpose and unique asset creation capability positions the group to capture opportunities and generate value throughout the recovery process and beyond.” Lloyd-Hurwitz said.
Dexus also revealed a $195 million devaluation or 1.2% fall over the six months to June 30 2020, in contrast to the $656 million gain in the first half to December 31 2019.
“The latest independent valuations demonstrate the resilience of our property portfolios in this uncertain environment. The office portfolio experienced a circa 1.5% decline on prior book values as a result of the softer assumptions relating to rental growth, downtime and incentives over the next 12 months. The industrial portfolio experienced a circa 0.7% increase on prior book values, reflecting the quality of the portfolio and investment attractiveness of the asset class.” Dexus CEO Darren Steinberg said.
The weighted average capitalisation rate of the office portfolio tightened circa one basis point from 4.98% at 31 December 2019 to circa 4.97% at 30 June 2020 and the industrial portfolio weighted average capitalisation rate tightened circa 12 basis points from 5.78% at 31 December 2019 to circa 5.66% at 30 June 2020.
Despite the likes of GPT, Stockland, SCA Property Group, Mirvac and Dexus recently revealing devaluations, Moody’s said property values would need to fall significantly for AREITs to breach gearing and covenant thresholds.
“We expect retail property values to decline in the next 12-18 months because of weak demand and economic activity resulting from coronavirus related disruptions. Office property values will fall to a lesser degree, and continued demand will support industrial property values,”
Having said that, Moody’s said average property values would need to fall 34% to breach the top end of the rated REITs’ target gearing (debt/asset) ranges and fall 55% to breach their covenant thresholds. The REITs came into the downturn with balance-sheet buffers to withstand an increase in gearing.
Diversified AREITs with retail property are also exposed to devaluations but it will be mitigated by exposure to industrial as well as office properties.
“Stockland Group has the largest exposure to retail. SGP has significant buffers within its covenants, but it will approach its rating threshold if its retail property values decline more than 30%. We expect office property values will decline only moderately over the next 12-18 months and do not see material risks to gearing levels of other diversified AREITs,”
On the other hand, Moody’s said industrial property values continue to be supported by e-commerce and increasing focus on supply chains, as evidenced by Woolworths’ recent decision to investment $780 million in two automated distribution centres in Sydney.
“Unlike retail and office, we expect industrial property values will be flat to up slightly over the next 12-18 months. The pandemic has accelerated e-commerce penetration in Australia and increased focus on supply chains,”
Moody’s said industrial property players Goodman Group and the Charter Hall Prime Industrial Fund will benefit most.
