Property plunge puts listed landlords at risk of breaching loans

The dramatic fall in the value of office blocks and shopping centres could hit the ability of property companies to pay loans back.

The depressed share prices at which some trusts are trading already implied that the listed market was expecting large scale property devaluations. Picture: Saeed Khan / AFP

A series of major companies in the real estate investment trust sector are in danger of breaching the loan covenants their lenders have set, as well as their own gearing targets, if commercial property prices sink further.

The warning from the property analysts at investment bank Morgan Stanley comes as vendors struggle to unload large office towers and shopping centres, with further discounting expected in order to get assets away.

The bank’s analysts Simon Chan and Lauren A Berry said that if capitalisation rates used to value properties shift out so that the spread above the Australian ten year bond yield reverts to the average rate over the last two decades, some major companies could be in strife.

The bank warned earlier this month that asset values across the property groups’ portfolios could potentially drop by between 17 per cent and one-third if their capitalisation rates blew out so they were back in line with historical averages.

The analysis shows that the Charter Hall Long WALE REIT could possibly breach gearing covenants while five other companies could breach the top into their self-imposed gearing targets.

The Charter Hall-run fund has already flagged it will sell some assets to address gearing levels on it $6.8bn portfolio that spans office towers, warehouses, social infrastructure, rural assets and exposures to pubs and service stations.

Covenant breaches could lead to lenders requesting a lockup of distributions, debt restructuring, faster repayments or high interest rates being imposed.

Just breaching gearing targets has fewer implications because they are set by the companies themselves, but many are already trying to sell down assets in order to address investor concerns.

The Morgan Stanley analysis noted that the depressed share prices at which some trusts are trading already implied that the listed market was expecting large scale property devaluations.

The analysis showed that Charter Hall Long WALE REIT’s covenant gearing would rise to 56.8 per cent – above its 50 per cent covenant disclosed by the company – if cap rates were to expand to historical levels relative to bond yields.

For Charter Hall Retail REIT and two listed trusts run by Centuria Capital that own offices and industrial property, covenant gearing would move to within 2 per cent of 50 per cent levels, while HomeCo Daily Needs REIT would be within 6.7 per cent.

The analysis showed that if asset values fell by in the 17 per cent to 33 per cent range, the Charter Hall long lease trust, the Centuria industrial fund, and the HomeCo daily fund, as well as large groups GPT, Mirvac and Region could see gearing rise above the top end of their respective set ranges.

Property companies are alive to the risks and many have been quietly offering up assets or looking at alternative uses to boost their values, partly in order to avoid equity raisings while their share prices are depressed.

The drought of major deals also means that cap rate expansion takes time to flow through and even during the GFC, when credit markets stopped trading, it took 15-18 months for Sydney office cap rates to widen 170 basis points.

“While potential asset sales and covenant renegotiations is always possible, the issue is that REITs could remain in a state of uncertainty until investors are confident that gearing and valuation will be less of a headwind, and this may not happen until there is more clarity on global rates, or balance sheet management,” Morgan Stanley said.