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Australian
Reit crunched by global credit crunch
Posted by luxuryasiahome on September 9, 2008
Fitch Ratings has on Tuesday noted that the Australian Reit (A-Reit)
reporting season has concluded with many A-Reits reporting
significant declines in profitability due to a reassessment of
the carrying values of underlying assets.
Current accounting standards require changes in asset values to
flow through the profit & loss statement, resulting in a
significant turnaround in A-Reit reported results.
Most A-Reits have revalued a significant proportion, if not all,
properties within their portfolios, undertaken by either
independent valuations or by directors’ valuations, and usually
a combination of both.
As anticipated by the agency on 12 August 2008, Australian
property capitalisation rates have begun to rise, and the impact
of these rises has started to flow through to valuations of
properties held by A-Reits.
While sales evidence remains low, valuers have begun to adjust
their capitalisation rate expectations upwards and property
valuations have begun to contract where rental rises are unable
to offset the rises in capitalisation rates.
The recent increases in capitalisation rates have been generally
at or below the lower end of the 50-150 basis point range
predicted by the agency in August 2008.
This is a result of the market being at the early stages of a
readjustment phase that will see further rises in capitalisation
rates.
‘The property cycle has definitely peaked and Fitch expects
further downward adjustments in A-Reit property values,
particularly secondary properties, as the present credit crunch
reaches out more broadly into the property markets, forcing a
reappraisal of values,’ said David Carroll, Director with
Fitch’s Reits team in Sydney.
With the global credit crunch affecting property markets and
values, there has been a significant refocusing by the A-Reits
to protect their current credit metrics.
The A-Reit reporting season has seen a re-evaluation of property
values with some assets marked down, a lowering of growth
expectations, reductions or deferments of developments, changes
in distribution policies to pay distributions from cash earnings,
changes in executive management and an increasing intent to sell
non-core or secondary properties to focus on higher quality core
properties that should better weather the changed market
conditions.
This reporting season has also seen several A-Reits mark down
carrying values of property related businesses purchased in
markets outside Australia during a more expansionary market
phase.
On a more positive note, Fitch is not seeing tenant defaults as
yet and occupancy rates remain high in most Australian markets
the agency monitors, allowing property generated cash flows to
remain strong.
The recent interest rate cut by the Reserve Bank of Australia
should assist debt coverage ratios to remain relatively stable,
although this may be offset by rising debt margins as existing
debt facilities mature and are rolled into new facilities that
in most instances will see higher margins being charged.
Fitch will continue to monitor the credit metrics of the A-Reits
sector and provide commentary and analysis of the sector as
devel opments occur.
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