This article is from the Australian Property Journal archive
AUSTRALIAN REITs continue to be constrained by uncertain business conditions, with high interest rates, lower household spending and weakening asset values.
According to the latest analysis from Moody’s Investor Service, so far 2024 is holding on to the themes of the previous fiscal year, with the next 12-18 months forecast to be challenging for rated AREITs.
Higher interest rates threaten to weaken interest coverage, as buffers continue to erode.
Though rated AREITs will still benefit from strong asset quality and favourable leasing structures, with liquidity to weaken from very strong levels.
Office fundamentals won’t see a rebound in 2024 and will instead remain weak, with asset values falling throughout the year.
For Dexus, a good-quality portfolio of assets across the office sector has left the REIT resilient, with office occupancy levels well above the market average at round 94.5%.
With the group also announcing an increase in effective like- for-like income for its office portfolio, supported these occupancy levels and a minor improvement in incentives, which sits well below the market average.
While poor consumer sentiment and consumption amidst the cost of living crisis will impact retail, strong population growth and new supply of space will prop up those AREITs with exposure to the sector.
This should be apparent in Scentre Group’s results this over the next 12-18 months, with strong operating metrics and supportive lease structures to support earnings growth for the group.
While Scentre Group posting credit positive 2023 full year results, Moody’s expects the current high-for-longer interest rate environment to impact interest coverage ratio, which is already near the rating threshold.
Likewise, after Vicinity Centres announced credit positive results for the 1H24 period, strong portfolio with favourable lease structures, a healthy balance sheet and liquidity, should buffer against weakened retail sales and slowing economic growth.
Unsurprisingly, industrial is forecast to remain the strongest performing asset class throughout 2024.
Centuria Industrial REIT for example posted solid credit positive results for 1H24, with very high re-leasing spreads and the group set to benefit from strong rental growth over the 12-18 month period as expiring leases are renewed.
While rising interest rates did result in a modest weakening in CIP’s interest coverage, the REIT continues to maintain headroom above its covenant level.
Goodman Group also posted strong credit positive results for the six month period, largely as a result of the group’s strong rental growth, high occupancy and increased development and management earnings.
Moody’s expects Goodman’s EBITDA will continue to benefit from high demand for well-placed infill industrial and logistics assets, despite asset values declining in the first half.
