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negative outlook for trusts...

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    Negative outlook for trusts
    Carolyn Cummins Commercial Property Editor
    November 22, 2008

    THE ratings agency Moody's Investors Service has issued a negative outlook for Australia's real estate investment trust sector for the next 12 to 18 months.

    This contrasts with a stable outlook for the trusts, known as A-REITs, in a report Moody's issued in April.

    Already reeling from a series of diluting capital raisings, assets sales without buyers, falling asset values and nervous bankers, the sector is now facing the prospects of a further weakening in its operating environment, increased refinancing risk, and probable worsening leverage due to asset depreciation.

    And investors' concerns are being fuelled by more properties - office, retail and industrial portfolios and individual assets - being offered for sale, among them a half-interest in 1 Martin Place, the home of Macquarie Group. The unlisted Macquarie Martin Place Trust is offering it for about $265 million. The other half is owned by the listed Macquarie Office Trust.

    Also for sale are the failed Allco group's half-share in the Ernst & Young site at World Square, George Street, and Centro Properties' Australian and US shopping malls.

    And if buyers cannot be found, at the appropriate prices, the trusts face an uncertain future. The one saving grace for trusts such as Centro is that the banks do not wish to end up as property managers, as occurred in the early 1990s.

    Analysts say that in the case of Centro the underlying businesses - shopping centres anchored by supermarkets - are performing well, as people still need to eat. Centro is also earning significant fees as the manager.

    But it remains deeply in debt and, if its bankers experience pressure from other sources, they may call in debts.

    Clement Chong, a Moody's vice-president and senior analyst, said that despite the negative outlook most A-REITs rated by Moody's had a stable outlook as they were better placed than the wider sector to withstand the challenging operating and credit environment.

    "Their solid underlying fundamentals, including strong asset profiles, remain key credit strengths, reducing cash flow volatility, compared to the A-REIT sector as a whole," Mr Chong said. "That said, the weaker operating environment is reducing the stability in their ratings."

    In the past six months there had been a dramatic change in the prospects for growth in gross domestic product, household spending, unemployment and overseas property markets. That had made the environment even more difficult for A-REITs.

    Mr Chong said that in addition, severe dislocations in equity and debt markets, as well as an increased risk of asset devaluation, were exerting pressure on the trusts.

    "The sector faces high refinancing risk over the next two years amid an environment where access to debt or equity funding has become very difficult."

    However, the liquidity of rated A-REITs was adequate, given the absence over the next 12 months of material debt maturities not backed by committed funding. Furthermore, the rated A-REITs could, within their current ratings, withstand asset devaluations reasonably well.

    But Mr Chong warned the challenges to access to capital were slowing development channels and growth in wholesale funds. The concern was that most rated A-REITs had extensive development pipelines, but not much committed funding beyond next year, so capital constraints would probably lead to a deferral or scaling back of these pipelines, resulting in slowing income growth.

    The broking house Citi said that while several A-REITs had plans to sell assets, there were not enough buyers to raise the capital sought. The Citi report said it had become evident that assets could not be sold within a short time. And, if assets could be sold, that would help only in part, because potential buyers were sceptical about current values and were concerned that finance they would need for acquisitions was unavailable.


    Cheers, Pie :)
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