By Maria K. Maslovsky
In an Environment of Tighter Credit,
Higher-Rated Public Firms Stand Out
THE RETRENCHMENT OF THE GLOBAL CREDIT
markets has left virtually no commercial real estate market
unaffected. Property owners worldwide are feeling the
pinch of increased creditor caution, such as lower loan-to-value ratios and wider spreads. Reduced lending availability also pushes property values down, making dispositions
and refinancings more challenging.
It’s comforting that the larger, investment-grade REITs
are entering the economic slowdown with solid balance
sheets, good liquidity positions, strong occupancies and
stable operating fundamentals. Still, the broader economic
consequences of the credit crunch, such as a recession in
the US and its possible spillover effects globally, could have
an additional negative impact on REITs’ performance.
In the US today, REITs are facing much tighter credit
New opportunity funds are being
formed to take advantage of more
favorable asset pricing.
terms and increasing capitalization rates, coupled with
volatility and limited activity in some of the markets typically accessed by these firms to fund their businesses. REITs
have traditionally financed their assets and operations via
secured and unsecured debt, as well as equity and preferred stock. The slowdown in the unsecured markets,
however, has led trusts to rely more on bank debt, namely,
increasing their lines of credit. Positively, these facilities are
typically structured on an unsecured basis.
In Canada, REITs and other real estate firms are broadly
facing the same issues as in the US. However, due to the
smaller size of the Canadian real estate debt market, large
pension fund investors, which are significant and sophisticated property owners and lenders, serve as anchors of relative stability in this marketplace. However, should the economic situation in Canada deteriorate, Canadian property
firms will feel the additional pressure on their performance.
On the plus side, single-family housing prices have held up
better in Canada than they have in the US, helping to support the national economy.
In the United Kingdom, the credit environment has also
been tightening, a situation that has been exacerbated by
the liquidity crisis at Northern Rock plc. Northern Rock specialized in residential and commercial mortgages; therefore,
its difficulties put additional pressure on UK’s commercial
lending climate. Many banks have pulled back on extending credit and are accumulating cash. New loans that are
being made primarily involve existing clients with good track
records. However, loan-to-values have declined and
spreads widened. Smaller, weaker players have had more
difficulty in obtaining funding. While a number of investors
have backed out of some European property investments,
thereby pushing down values, new opportunity funds are
being formed to take advantage of the more favorable
asset pricing. Similar realities with respect to credit tightening are affecting many other European countries.
Conditions in Australia are also comparable. Over the
past six months, listed property trusts in Australia have had
very little access to the public debt markets, relying instead
on banks, which have reviewed lending terms. While LPTs
have traditionally been viewed as stable investment vehicles, those with weaker balance sheets—that includes,
high leverage and substantial amounts of short-term
debt—and exposure to riskier operations, such as new
development or overseas acquisitions, may see their credit profiles deteriorate.
Among the weaker issuers, Centro Properties Group
has been struggling with the need to refinance large
amounts of short-term debt in an unfavorable market,
which prompted Moody’s to initially downgrade the public
debt of its US subsidiary, Centro LP, to B3 and maintain a
review for possible downgrade. However, on Feb. 15,
Moody’s affirmed the B3 senior unsecured debt ratings of
Centro NP LLC. Last month, the company announced that
it had been granted an extension until Sept. 30 and its
parent, Centro Properties Group, was granted an extension
until April 30 on its Feb. 15, 2008 refinancing deadlines. ◆
The views expressed in this article are those of the author
and not Real Estate Media or its publications.
Maria K. Maslovsky is an assistant vice president in the commercial
real estate finance group at Moody’s Investors Service in New York
City. She may be contacted at firstname.lastname@example.org.
Terry Fanous, Merrie S. Frankel and Lynn Valkenaar, also of
Moody’s, contributed to this article.
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