There are parallels between the 2008 housing crash and the strains in global commercial property. How bad can it get in Australia?
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Sydney and Melbourne prime vacancy rates, at 15 per cent and 16.2 per cent, are at their highest levels in over 20-years, according to research from Jefferies. That will, all things being equal, put “downward pressure on rents and valuations which get hit by rising cap rates”.The listed REITs it regards as most vulnerable to these trends are GPT, Dexus and Mirvac, but it notes the large discounts to net asset value of 37 per cent, 29 per cent and 21 per cent imply the valuation hits are captured in the share price.
The report sought to identify which REITs had the highest gearing the lowest interest coverage ratios , the most immediate refinancing and the most offshore debt .Overall Morgan Stanley’s analysts concluded that the sector tends to have underlying support from its banks and there’s no clear and present danger in terms of breaching loan to value and interest cover covenants, but the sector’s debt composition warrants close monitoring.
Most lending experts say if there are issues, the banks can nurse any troubled exposures over a 12 to 18-month period with limited spillover. But borrowers should expect that they will adjust valuations or lower loan to value ratios in anticipation.
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