Investment funds across Australia’s real-estate sector remain stable from a financial perspective despite headwinds in sectors such as office and retail property, the latest report has found.
Releasing its latest report, credit rating service Moody’s said ten of the thirteen real-estate investment trusts (REITs) which it covered reported either credit neutral or credit positive results in the year to June.
Only three funds: Vicinity, Stockland and Charter Hall Retail received a negative result.
This does not mean that these trusts are in financial difficulty but rather that their outlook is less favourable compared with what was the case twelve months earlier.
In its report, Moody’s said the environment for REITs varies across sectors.
On the positive side, favourable conditions in industrial property in eastern seaboard markets are being driven by the expansion in e-commerce, improving logistics, population growth, infrastructure spending and a shortage of well-located land with good infrastructure.
Sydney is the strongest market whilst land supply is also tightening in Melbourne where current take-up levels exceed long-term averages.
Not surprisingly, many REITs are reweighting their holdings toward this sector, mainly at the expense of retail.
These include MGR, SGP and GPT. Dexus has also created a fund to grow its industrial asset base.
In offices, Moody’s anticipates that robust performance will continue amid low vacancy rates in Sydney and Melbourne but will slow in 2020 and beyond as a significant volume of new stock comes online.
Modest improvement is also expected in residential, where Moody’s says conditions have stabilised.
Retail conditions remain weak, however, amid subdued house prices, sluggish wage growth and competition from e-commerce.
In its report, Moody’s says the credit position of most REITs remains solid.
Thanks to equity funding and asset sales, average gearing levels of 24 percent remain conservative and buffers remain strong – albeit with retail sector focused funds likely to weaken.
Going forward, however, Moody’s expects debt and leverage to increase despite remaining at modest levels as money from aforementioned asset sales is deployed to fund growth.