Debt worries return to property trusts

Stretched borrowing is again clouding Australia’s property trusts, and threatens to make investors uncomfortable.

Cromwell Property Group CEO Paul Weightman

Just in time to mark the 10th anniversary of the GFC, when many Australian property trusts turned into wealth destruction machines, the issue of stretched borrowings — also known as high gearing — is on the table again, with Cromwell Property Group ringing the bell.

With quite woeful timing, Moody’s rating agency this week put the Cromwell group on “review for a downgrade” — a move which would push some of its debt into the “speculative” category just as the wider group plans a listing in Hong Kong.

A quick look at the latest gearing tables for Australia’s so-called REITs shows the sector is allowing the issue of leverage to cloud its achievements once again.

Moreover, Cromwell is not alone with a gearing level of 40 per cent plus — often a warning for ratings agencies and others.

In fact, it’s not that REITs have cooled off on borrowing — rather they have been borrowing at low rates against a prolonged period of rising asset values, and that can’t go on forever.

As it stands several big names have already floated to the 40 per cent level. Along with Cromwell, which has managed a striking 46 per cent, Centuria Industrial is up at 43 per cent and Growthpoint is sitting smack on 40 per cent.

ASX200 A-REIT index last traded at 1324.9 points

Among smaller and newer REITs, National Storage is running at 46 per cent.

No doubt each of the property trusts on the higher end of the gearing scale has an explanation.

Cromwell, for example, is planning some asset sales which should improve its overall financial position.

Then again Cromwell is also at the extremity of the charts with the income it is managing to offer investors. Cromwell’s dividend yield is a mighty 8.6 per cent against a sector average of closer to 6 per cent.

Simple gearing ratios are not the only game in town when rates are beginning to rise (especially in overseas markets). Other factors can also flash red for investors such as liquidity (the ability to raise cash easily).

“Moody’s considers Cromwell’s liquidity position to be weak, as it is funding investments with short-term loans,” says the ratings agency.

What’s more, it’s not just the Cromwells or the Centurias of the sector starting to test the numbers. Westfield Corporation is also at the upper end of the spectrum with a gearing rate of 37.5 per cent.

For the record, the A-REITs with the lowest gearing include two of the best known names in the market — the Goodman Group at just 8.3 per cent and Lendlease at 12.9 per cent

But a few more reports from the sector which show an extended trend of elevated gearing levels will make some seasoned investors in this sector very uncomfortable.