Welcome to this week's Property News and to the end of Week 20 of COVID impacts.
As we head into reporting season for the major REITs, three very obvious themes will quickly emerge;
- Shopping Centres Landlords will report significant declines in revenue, be very cautious about the future conditions and provide little if any guidance about the future.
- Office Landlords will see some minor reductions in revenue over the last quarter, will play up the resilience of the CBD tenants or the metropolitan markets, but will factor in reductions in revenue for 2021.
- Industrial landlords will report increases in revenue in line with CPI and will hold an optimistic outlook for the sector overall and maintain distribution growth in 2021.
All REIT managers will demonstrate that they are well capitalised, however few will demonstrate how close they may be to breaching loan covenants and what conditions would have to exist to cause a breach and what they should do now to avoid this.
The Interest Coverage Ratio (ICR) will be the first key measure to monitor as vacancies rise and as the National Code of Conduct see's landlord's have to bear a significant drop in income from their tenants. Several Managers have raised additional equity to reduce debt and thus interest costs (to avoid an ICR breach), however several REITs are still exposed to falling incomes.
Falling valuations will also become an issue, particularly if market rents drop (and they will) and cap rates soften (which they will). The compounding impact could see valuations drop -30% and place many REITs in breach of LVR covenants.
The only cure for these issues is to repay debt via raising additional capital and or selling assets.
Some REIT Managers like Dexus and Lend Lease are already in the market to dispose of key assets (such as Grosvenor Place in Sydney) in the hope that they are able to achieve a higher price today than in 12 months time. Other asset manages will seek to spin off assets into new unlisted funds in the hope of retaining the assets under management.
Market risks are elevated and a cautious approach to investment decisions is required now more than ever.
Until next week
Warwick
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