Moody’s expects credit quality of SA REITs to remain stable despite headwinds

The new Growthpoint Properties office reception in Sandton. SUPPLIED.

The new Growthpoint Properties office reception in Sandton. SUPPLIED.

Published Jun 6, 2024


Moody’s Investor Services analysts yesterday said the credit quality for South African real estate investment trusts (REITs) “will remain stable” in the next 12-18 months, despite elevated capital costs, weak demand in the office space and persistent challenges for the retail sector.

The ratings agency said SA REITs will be solidified by diversified portfolios, adequate loan-to-value ratios, and good unencumbered asset levels.

Moody’s reviewed Growthpoint Properties, Redefine Properties, and Fortress Real Estate Investments, and said this week that the three SA REITs were “exposed to a weak office sector to different degrees, although this is offset by their presence in the more stable industrial, logistics and retail” sectors.

Nonetheless, Moody’s investment analyst Iker Ballestero Barrutia yesterday said that “with interest rates high and financial markets volatile, there is a risk of an extended period of tight liquidity” for the SA real estate sector.

Headwinds for the SA real estate sector were coming from low demand in the office market as depressed corporate demand and structural oversupply, particularly in the Gauteng area continue to drag rental prices down.

Although there were concerns that SA REITs with too much exposure to struggling retailers such as Pick n Pay would be affected by lease re-negotiations, Moody’s said the retail real estate market in the country was starting to recover.

Budget retailers such as Boxer have been proving to be resilient and attracting stronger footfalls, providing some respite for retail property developers.

“Retailers are slowly recovering as footfall levels improve and industrial and logistics assets remain in high demand,” said Barrutia.

SA REITs are also being affected by high costs of capital which were weighing down on cash flow generation.

This has resulted in an increase in elevated debt refinancing by most real estate companies, thereby bumping up borrowing costs.

Thus, Moody’s expect Growthpoint, Redefine and Fortress “to face tight financing conditions” over the next 12 months.

Worse still, power outages are posing problems for the retail property sector in particular.

In the final analysis, Moody’s said the retail real estate sector was directly linked to South Africa’s macroeconomic performance.

“Demand for retail assets is driven by GDP growth. But the demand of retail assets is governed by the availability of energy-efficient assets because of frequent power cuts in the country,” it said.

However, there are some upsides to Growthpoint (Ba2 stable) and Redefine as they are seen as having “sufficient liquidity to cover debt maturities” over the next 12 to 18 months.

They are also set to benefit from an expected slight improvement in macroeconomic conditions as well as abating power outages.

The three SA REITs’ “good, unencumbered asset levels, adequate loan-to-value ratios and growing international operations” was also seen providing support for higher credit quality.

Barrutia said Growthpoint and Redefine had enough liquidity to cover debt maturities for the next 12-18 months, while Fortress continued to rely on short-term debt refinancing.

For Fortress, Barrutia said: “We see the sizeable investment in the unencumbered shares of NEPI Rockcastle to be a source of alternative.”

International diversification, also seen among SA banks that are experiencing a rise in income from regional operations, was becoming more important as an offset to muted growth in SA.

International diversification was weighing in as an additional support for the credit quality of the three SA REITs.

Of the three, Growthpoint has the largest international exposure, with investments in Australia, the UK, and Europe that represented 48% of the company's property value and 36% of gross property income as of December 31 2023.

About 38% of Redefine’s property value was in Poland while for Fortress, international operations through its investment in NEPI and direct property ownership in central and eastern Europe represented around 35% of its property portfolio.