The FINANCIAL — Fitch Ratings has on August 16 noted that the Australian REIT (A-REIT) reporting season, which is just commencing, will see continued property capitalisation rate expansion, and consequential price declines impacting profitability.
In addition to declines in property values, Fitch expects continued weakening carrying values of offshore asset management businesses purchased in recent years by some market participants in more expansionary times. Current accounting standards, which require changes in asset values to flow through the profit & loss statement, are anticipated to reflect negatively on A-REIT results.
"Most A-REITs have revalued a significant proportion of, if not all, properties within their portfolios, undertaken by either independent valuations or by directors' valuations, and usually a combination of both. Those that have recently reported property valuation changes are seeing continued value declines for the half year reporting period to June 2009 in the order of 10%-15% on a portfolio basis, and could potentially be much higher on an individual basis, on top of previous value declines in the order of 10%. Property values generally peaked in the December 2007 reporting season, and have been declining at a faster rate with each additional reporting season," Fitch informed.
Falling property values have affected the credit metrics of many A-REITs, particularly gearing levels, leading to concerns around the ability of some A-REITs to meet covenant requirements. In order to protect their credit metrics, many of the larger A-REITs have over recent months raised additional equity capital (around AUD15bn). This has allowed some A-REITs to reduce overall debt levels and meet immediate debt maturities, thereby reducing liquidity risk and generally taking pressure off debt covenants. This is not the case for all A-REITs and these two risks continue to remain significant for many market participants.
"Fitch does not expect the current reporting season to see a bottoming of property values, given the continuing lack of liquidity in property financing markets that is affecting the ability of purchasers to fund transactions," says David Carroll, Director in Fitch's REIT team. "Book values are still lagging behind reality due to a lack of transactional evidence, allowing A-REITs to smooth the downward trend of values. The agency expects a higher level of transaction volume as A-REITs continue to restructure their property holdings and to downsize balance sheets to protect their credit metrics and manage liquidity. This process will continue to affect values, as transactional evidence allows valuers to become more confident in assigning independent valuations. Fitch expects Australian property values to trough in H110 with a peak-to-trough value decline in the order of 30%", notes Mr. Carroll.
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