Covid-19 could strike REITs a hard blow

The hit from the Covid-19 crisis could last longer and deeper than just the lockdown period for Australian and New Zealand real estate investment trusts (REITs).

Thursday, April 30th 2020, 10:22AM

by The Landlord

That’s according to a new report (which is not a rating action) from global credit ratings agency Standard & Poors (S&P).

REITs – aka listed and unlisted property funds – invest in a portfolio of commercial properties and are considered an affordable way of investing in the commercial property sector.

New Zealand’s commercial property sector has been hard-hit by the lockdown and, as the Covid-19 related economic recession unfolds, that is set to continue.

S&P credit analyst Craig Parker says that for commercial landlords, the hit could extend beyond the lockdown period if the economic downturn exacerbates tenant distress and limits asset sales or other capital raisings.

"Shopping centre landlords will be hit hardest among rated Australian and New Zealand REITs as retailers demand rent waivers, deferrals, or concessions to ride out a recession due to the COVID-19 pandemic.

“Furthermore, the pandemic may hasten a structural shift toward e-commerce and remote working, undermining retail and office REITs.”

Cost cutting, staff reductions, and changing work patterns are the biggest risks to office landlords, Parker says.

“This shift will become more widespread with a prolonged disruption, cutting demand for office space and overall market occupancy over the medium to longer term.

“Conversely, a boom in online orders will boost industrial landlords who own logistics space that provides the last mile of e-commerce delivery.”

But the situation has led S&P to place a number of rated REITs on a negative outlook. Currently, about 27% of Australian and New Zealand REITs that S&P rate have negative outlooks.

Additionally, further negative rating pressure could build up following the six-month moratorium on evictions for struggling tenants that can't pay their contracted rents.

Parker says that deteriorating financing conditions and reduced access to capital markets due to the COVID-19 outbreak will constrain real estate companies' debt management. “The real estate sector is highly capital intensive and relies heavily on debt capital markets."

But S&P believes that Australian and New Zealand REITs have either strong or adequate liquidity to absorb the shock.

“The REITs have sufficient cash and undrawn bank lines to meet bank and bond debt maturing over the next 12 months. We believe this reflects their more disciplined approach to liquidity management following the global financial crisis.”

More relief needed for commercial property sector

Tags: commercial property coronavirus Covid-19 investment market outlook property investment property management property syndicate Ratings S&P