Aussie Reits looking better after debt cuts, says S&P

Australian property trusts have improved their standing over the past year after cutting debt and repairing their balance sheets, according to a Standard & Poor’s report.

‘This time last year, few Australian corporates were having as tough a time as A-Reits,’ Craig Parker, an analyst at the credit rating company, said. ‘Since then, rated A-Reits have recapitalised themselves with new equity and aggressively reduced expensive debt.’

Many have also cut development projects, sold off non-core assets and raised capital, Mr Parker said.

Australian property trusts largely completed writedowns in the six months ended Dec 31, after the 16 members of the S&P/ASX 200 A-Reit Index reported combined losses of A$19.5 billion (S$24.9 billion), and lowered revaluations of A$21.7 billion in the year to June 30, according to data compiled by Bloomberg. The A-Reit index has climbed 62 per cent since its trough in March 2009.

The equity raisings undertaken by most property trusts in 2009 have reduced the amount of short-term debt needed to be refinanced in 2010 and 2011 to about A$7.7 billion from A$12.6 billion, S&P said. A-Reits now owe about A$35.3 billion in total, a A$10.2 billion drop from before the capital raisings, S&P said.

‘The equity raised has been used to repay expensive debt and better position the A-Reit sector to cope with much higher debt costs,’ Mr Parker said.

Stabilisation of asset values in the first half of this year, combined with an economic recovery in Australia, will keep retail and industrial property markets steady, according to S&P. Offices, though still needing incentives to attract tenants, will have moderate declines in real rents, it said.

Rising interest rates are ‘of concern’, even though most trusts do hedge to protect against the impact of higher borrowing costs, Mr Parker said. ‘While we believe the sector has sufficient latitude in their covenant headroom limits, any further deterioration as a consequence of a sharp spike in interest costs would be of concern,’ he said.

Source: Business Times, 22 Apr 2010