Real Estate Forum - March 2008

International Beat
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 maria.maslovsky@moodys.com. Terry Fanous, Merrie S. Frankel and Lynn Valkenaar, also of Moody’s, contributed to this article.